Posted on: 07/11/2017
According to recent statistics, many people of working age are underestimating their life expectancy, therefore running the risk of pension pots drying up during retirement. Life expectancy is climbing at an alarming rate; with the average age predicted to reach over 100 by the middle of the century. In order to effectively plan for such longevity, it is sensible to take a proactive approach to financial planning, including pensions and investments, at an early stage.
1. Start planning early
Our number one tip is to start to plan for your future early. Whatever stage of the financial journey you’re at – whether you’re building up savings, half way through your working life or starting to think about retirement – the earlier you make a plan, the more options will be available to you and the easier it will be to reach your financial goals.
2. Strike the right balance
Whilst there is always a balance to be had between saving for your future and having accessible funds for the things you need to spend on in the more immediate future, the greater the amount you manage to save, the greater your number of options will be when you reach retirement, and along the way also. Additionally, for any investment that is market linked, be that stock and shares ISAs, a fund portfolio or a pension, the longer it is held, the more likely you are to see a decent return.
3. Take a reality check
Retirement may seem a long way off but unless you plan to be working until you’re 68, the earliest age at which state pension will kick in in the future, you’ll need to make a plan by way of a personal pension or other investments. There are many tools available online that quickly and simply give you an estimate of the amount you may need for retirement and how much you therefore need to save. Don’t forget to factor in inflation; if you are several years away from retirement, you need to consider that prices will increase and you may therefore need to account for greater expenditure requirements.
4. Review your pension provisions and contributions
Although auto-enrolment has resulted in a dramatic increase in the number of people with personal pension plans, these are not necessarily the best investment products. Reviewing your existing pension provisions on a periodic basis is always a worthwhile exercise as it helps ensure they remain competitive and suited to your needs.
Be sure to dig into your previous employment history – it’s surprising how often we come across pensions from previous employers that clients have simply forgotten about!
5. Don’t discount ISAs
Although the initial interest rates available on cash ISAs does little to entice us, from a long-term planning perspective, ISAs still remain an attractive proposition, especially since the annual allowance for contributions was increased to £20,000 per annum. A long-term investment in a stocks and shares ISA will not only benefit from any gains in performance in a tax free environment, but any increases will also benefit from compound interest.
The introduction of the new LISA will provide an additional means for younger adults to save for later life and could be worth considering alongside pensions and other savings vehicles.
6. Be tax savvy
Personal pension contributions can significantly reduce income tax liability. There are a number of ways in which tax relief can be received but most commonly, basic rate tax at 20% is automatically claimed from HMRC by your personal pension provider and added to your pot.
If you’re a higher or additional rate taxpayer, you can claim further tax relief from HMRC. This is usually claimed through your self-assessment tax return, although HMRC may also adjust your tax code to give you this additional relief.
If you are a company director, you’ll know that dividends over and above the current £5,000 tax free allowance will still be chargeable at the relevant rate. Making pension contributions could help to reduce overall tax liability. By making employer pension contributions from profits, corporation tax liability can also be significantly reduced.
7. Take advice
Pension freedom has brought about much more flexibility in the way pensions are accessed, but this doesn’t mean that pensions are simple! Advice should be taken before any changes to pension contracts are made because some contracts contain features that would be very difficult to replace if you move providers – such as guaranteed annuity rates, guaranteed growth rates and enhanced tax free cash entitlements.
8. Know your allowances
Every year each individual has a set of allowances that apply to their finances. In the current tax year (2017/18) these are £11,500 income tax allowance alongside a basic rate limit of £33,500, ISA contribution allowance of £20,000, and an annual pension contribution allowance of £40,000. Should you be able to, make sure you use these carefully and to their maximum benefit.
If you’re approaching retirement, you’ll need to think about the tax implications of funding your retirement. Income tax is still payable on pension draw downs, so taking large amounts of cash from your pension pot could pull you into a higher tax bracket.
Morven Millar is a Chartered Financial Planner with 30 years experience (as of today!) in the financial services profession. Advising clients in all areas of financial planning, although with particular expertise in the field of pensions, Morven works with high net worth individuals and couples, along with businesses, to help them achieve their goals.
Morven is a founder Director of Gresham Wealth Management Ltd and a Fellow of the Personal Finance Society.
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