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Kwasi Yeboah joins the Pension and Investments Podcast once again, this time to explain the process of retirement planning.
What exactly is retirement planning?
Retirement planning is essentially making sure that we don’t run out of money once we stop working in later life. It involves identifying your retirement income objectives and making decisions now to help you live the sort of life you want after you retire.
We’re all familiar with the concept of putting money aside for a rainy day, but often people focus on immediate goals, maybe a holiday, buying a new house, paying school fees. Long term planning often takes a back seat. As Financial Advisers we’re here to bring home the necessity of retirement planning.
Once you’re near retirement, the planning is different. It involves reviewing your pension pots and the different benefits you may be entitled to claim at retirement.
Retirement planning and pension planning are often thought of as the same, but in fact your income in retirement may come from a number of different sources, not just pensions. Indeed, we’re seeing people continue to work well past retirement age. Pension planning is an important element of retirement planning, but it’s just a part of the greater whole.
Why do I need to plan for retirement?
The main thing I try to bring home to my clients is that no one else is going to do it for you. There’s a great misconception that the government will provide everyone with an income in retirement. In reality, what people will receive is not going to be a lot.
On top of that, over the last four or so years, pension provision has changed drastically. In the past you would work for one employer and they would provide you with an income for the rest of your life.
Now the onus is very much on the individual to make sure that they are saving adequately. A paper by the Financial Conduct Authority (FCA) in 2019 found that half of all 20 to 29 year olds have no retirement savings whatsoever. The 30 to 39 year olds had less than £30,000. An exercise I go through with a lot of my clients is to get them thinking about how much you would need each year to do what you like in retirement.
How would you get by on half of your current income? We then scale that up by 25 years for the value of a pension pot you might need in retirement. That exercise helps you begin to see the challenge facing many people and why it’s so important to start planning as early as you can.
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How do I plan for retirement?
Pensions are probably the most effective means of planning for retirement, but there are a variety of different retirement strategies. Many people decide to become a landlord or a portfolio landlord and live off the rental income in retirement.
But as far as tax advantages are concerned, a pension stands apart from the crowd. There are a couple of things to think about: making sure that you’re making national insurance contributions, either through employment or self employment, as this will entitle you to a state pension. Another is to maximise the pension contribution matching offered by your employer – so that they take some of the burden utilising tax efficient wrappers.
A lot of people are reluctant to invest altogether – because they’re worried about losing money or they don’t feel informed enough. The problem is, it is almost impossible to save enough in cash to live off in retirement. You don’t have to use a pension – you can use an individual savings account (ISA), for example, which is almost as tax efficient.
If you do decide to use an ISA to save for retirement, it is important to leave it where it is. We all know what it’s like putting something aside, saying we’re not going to touch it and then finding ourselves dipping into those savings. A big benefit of a pension is that your money is locked away until age 55 or later.
How can a Financial Adviser help?
We’re in a position to help anyone who has a financial query about retirement. If you have a retirement plan already, we can review it for you and identify any additional things to consider.
We can also help you consolidate old pensions into one accessible pot and provide an investment strategy that reflects your attitude to risk and capacity for loss.
The best bit of advice I could give listeners today is to start as soon as possible. Getting informed doesn’t have to cost you anything. And the start of this journey can be something as small as tracking down an old workplace pension or putting aside £50 per month into a pension or an ISA. But the important thing is to start today.
The value of pensions and investments and the income they produce can fall as well as rise. You may get back less than you invested.
Tax treatment varies according to individual circumstances and is subject to change.
We can also help you consolidate old pensions into one accessible pot, if this is the most suitable outcome for you, and provide an investment strategy that reflects your attitude to risk and capacity for loss.