Retirement

The importance of Financial Advice as you reach retirement

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At Retirement – a financial adviser will help you understand crucial options 

As you reach retirement age, a financial adviser will explain all the options available to you including 

  • A secured/guaranteed income approach 
  • A flexible/access approach 
  • Staging key financial decisions throughout your retirement 
  • Identifying any lifestyle gaps 

Your adviser’s role is to take the retirement worries away and be your go-to expert for all your financial questions and concerns.

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How much do I need to save for retirement?

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Ensure your money works effectively to enjoy retirement on your own terms.

How you invest in your 50s could significantly impact your quality of life in retirement. While there still is time to increase your retirement savings, a seemingly simple mistake could derail your plans. This is where obtaining professional financial advice becomes crucial.

With retirement now in sight, as you approach this milestone, ensuring your money works effectively will allow you to enjoy retirement on your own terms.

Clarify your Goals

‘Saving enough for retirement’ has likely been on your list of financial goals for some time, but now is the moment to become more specific. Knowing exactly how much you need to save will give you a concrete target. This amount will depend on factors such as your intended retirement age, your retirement plans, projected investment growth and inflation.

A financial adviser can demonstrate how long your savings may last in retirement, helping you understand if you need to adjust your goals or savings habits.

Review your Investment Portfolio

When you are in your 50s and nearing retirement, ensuring that your investment portfolio maintains a suitable balance between risk and reward is important. The right level of investment risk depends on how you intend to fund your retirement and how far away your target retirement date is.

For those planning to buy an annuity in a few years, moving your pension fund from stocks to lower-risk assets such as cash may be wise. This strategy helps protect your pension pot from potential stock market crashes just before you need it.

Maintain Growth Potential with Diversified Assets

If you plan to fund your retirement through income drawdown or other savings and investments, moving into cash too early could mean your money does not last as long as required. Retaining some exposure to stocks allows your portfolio the opportunity for long- term growth. Considering that your retirement could span several decades, inflation will inevitably erode the real value of your savings and reduce your purchasing power.

One way to mitigate the impact of rising prices is to remain invested in the stock market. Historical data shows that the stock market generally outperforms cash over long periods and exceeds the inflation rate. Diversifying your investments across various asset classes can help your portfolio withstand stock market fluctuations.

Focus on your Pension

Pensions are an exceptionally efficient method of saving for retirement, particularly when you’re in your 50s.This is largely due to the tax relief you receive on personal pension contributions. For instance, a £1,000 pension contribution costs just £800 if you’re a basic rate taxpayer, £600 if you’re a higher rate taxpayer or £550 if you’re an additional rate taxpayer. Tax relief is essentially free money from the Government, significantly enhancing your retirement savings.

Most individuals can contribute up to 100% of their UK relevant earnings or £60,000, or £3,600 if there are no relevant earnings (whichever is lower) into pensions yearly while still benefiting from tax relief until age 75. However, it is important to remember that your pension annual allowance could be lower if you have a very high income or have triggered the MPAA.

Maximising Unused Allowances

If you wish to save more than your annual allowance, it might be possible to maximise unused allowances from the previous three tax years under carry-forward rules. This strategy can considerably enhance your retirement savings by utilising every available tax benefit.

Make the most of your Tax Allowances

There are numerous other tax allowances investors can utilise. For instance, you can invest up to £20,000 (tax year 2024/25) into Individual Savings Accounts (ISAS) to benefit from tax- efficient income and growth.

You can withdraw money from ISAs whenever you desire without incurring any tax; this makes ISAs a useful source of income for those retiring before age 55 (the current earliest age at which you can access your pension subject to health and certain occupations). Additionally, ISAs form an integral part of a tax-efficient retirement income portfolio.

Other Allowances to Consider

Other allowances include the personal savings allowance, dividend allowance and Capital Gains Tax exemption. You can earn up to £1,000 a year in interest without paying tax if you’re a basic rate taxpayer. If you are a higher rate taxpayer, you can earn £500 a year without paying taxes. Additional rate taxpayers don’t receive any allowance at all.

The annual Capital Gains Tax-exempt amount from 6 April 2024 is £3,000. If the total of all gains and losses in the tax year fall within this exempt amount, no tax will be payable. Gains above the annual exemption will be taxable. The exempt amount cannot be carried back or forward. The unused amount is lost if it’s not used, in part or full.

Time to optimise your pension and make the most of available tax allowances?

Please contact us for more detailed advice on optimising your pension and making the most of available tax allowances. We are ready to help you navigate the complexities of retirement planning and ensure you achieve a financially secure and comfortable retirement.

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How much tax will you pay on your pension pots?

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Since 2015, individuals over the age of 55 with defined contribution (DC) pension pots have enjoyed full freedom to decide how to manage their pensions; purchasing an annuity (a guaranteed income for life) is no longer mandatory. More than 221 people fully withdrew a pension pot of £250,000 or more between October 2022 and March 2023[1], resulting in a tax bill of at least £97,500 each[2], according to new analysis of FCA figures.

Following the reduction of the 45p rate of tax from £150,000 to £125,140 from April 2023, a pot of £250,000 withdrawn in the current tax year (2024/25) would lead to a tax bill of at least £ 8,700 each – over £1,000 more. In the same period, October 2022 to March 2023, 1,537 people fully encashed a pot of between £100,000 and £24 ,000, leading to a minimum £27,400 tax bill for each person.

Someone fully withdrawing a pot of £174,500, the middle point of that range, would have paid at least £63,500 in 2022/23 and a minimum of £64,700 now. These figures only consider the pension – people with other sources of income at the time of withdrawal would pay even more tax.

Paying significant amounts of tax to access pensions

This is because when people fully encash their pension, HMRC taxes anything above their 25% tax-free pension cash as income, subject to the LSA position of the individual, so it’s taxed like an ongoing salary. The analysis shows there are hundreds of people out there paying significant amounts of tax to access their pensions.

It’s impossible to know whether their circumstances warranted them being subject to a big tax hit, but for most people, it’s something you’ll want to avoid.

It’s important to remember that most pension income is subject to tax, like other income. Fully encashing a large pot will almost always mean a very large tax bill, sometimes taking away many years’ worth of savings. Often, when people fully withdraw their pension, it is simply to move the money to their bank account. Not only does this mean their savings become eligible for tax, but they’re also potentially giving up investment returns.

Withdrawing retirement savings more tax-efficiently

The good news is that there are ways to make withdrawing your retirement savings more tax- efficient, and it’s possible to spread your withdrawals over many years, which can be more efficient. Taking just one option at retirement, such as cash or an annuity, could mean you miss out on an opportunity to maximise tax efficiency and consider your financial needs in the round.

It’s worth considering a ‘mix and match’ approach to your retirement income, which could help you achieve the best of all worlds – you could, for example, annuitise a portion of your pension fund to cover essential outgoings and leave the rest in drawdown to access as and when you need it. Annuitising is the process of converting a lump sum of money into a stream of regular payments that are made over a specified period of time. Be sure to speak to your pension provider about your options, and we’d strongly recommend seeking advice or guidance when taking your pension.

How much tax will I pay on my pension pots?

First, most individuals will receive 25% of their pension pot tax-free, while the remaining 75% is taxable. The amount of tax payable on that 75% depends on factors such as your tax code, the amount you withdraw at a time and whether you have any other income sources.

It is important to remember that the total amount you can typically take tax-free across all your pension pots is now £268,275 unless you have specific protections in place. Most people cannot access their pension pots until they reach age 55 (rising to 57 on 6 April 2028).

Understanding your personal allowance

Everyone is entitled to a tax-free Personal Allowance each tax year, just like when working. For the 2024/25 tax year, the Personal Allowance is £12,570, which has been fro]en at this level for several years. Any amount above this will be taxed as earned income according to your tax band. The simplest way to avoid paying excessive tax is to ensure you do not withdraw more from a pension pot than necessary. Taking it in small, regular amounts could help keep your tax bill down.

Remember, you only pay Income Tax on anything over your Personal Allowance. Therefore, if a pension pot is your sole income source, you could withdraw
£12,570 from it each tax year without paying any tax. Conversely, taking large lump sums in the same tax year (outside of your 25% tax-free entitlement) could push you into a higher tax bracket.

Combining tax-free with taxable withdrawals

You do not necessarily need to take all of your tax-free lump sum at once. Often, you can take it in chunks over several months or years, provided your pension plan allows this. For instance, you could withdraw from the taxable portion of your pot and top it up with some of your tax-free amount.

Exploring ISAs as an income source

Unlike your pension pots, savings in your Individual Savings Accounts (ISAs) are generally not taxed upon withdrawal. You can contribute up to £20,000 in the 2024/25 tax year (across all your ISAs) and will not pay tax on withdrawals or gains. If you have savings in an ISA, consider using them to supplement your pension income to help reduce your tax burden. Alternatively, you could use your ISA to cover your entire retirement income before touching your pension.

For some, the early years of retirement can be more costly, necessitating a higher income. Hence, using tax-efficient withdrawals from your ISA to cover this period might be sensible. As you age and settle further into retirement, your expenses may decrease. Perhaps you have paid off your mortgage, enjoy less expensive hobbies or your children no longer rely on you financially. This could mean you can eventually afford to live off a more modest pension income, thus reducing your tax liability.

Ready to discuss how to manage your pension efficiently?

For further information and personalised advice on managing your pension withdrawals efficiently, please contact us so we can guide you in the most appropriate way for your unique situation.

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Source data:

  1. Retirement income market data 2021/22 FCA
  2. Calculated using Which’s tax calculator, Income Tax calculator and salary calculator for 2024/25, 2023/24 and 2022/23 – Which? Figures rounded to the nearest £100.

Britain’s biggest pension taxpayers

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There are ways to make withdrawing your retirement savings more tax-efficient, and it’s possible to spread your withdrawals over many years, which can be more efficient.

Taking just one option at retirement, such as cash or an annuity, could mean you miss out on an opportunity to maximise tax efficiency and consider your financial needs in the future.

We have produced a helpful guide on how to avoid becoming one of Britain’s biggest taxpayers, which you can download below:

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Only two-fifths of Britons know how to boost their pension

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How much money will you have for retirement, where it’s invested, and what are you being charged?

According to new research[1], just two-fifths (42%) of the UK population know how to contribute more to their pension. The study also found that a quarter of those with multiple pots would not know where to start consolidating multiple pension pots accrued throughout their working life.

The Financial Conduct Authority (FCA) Financial Lives Survey reported that 47% have not reviewed how much their pension pot is worth in the last 12 months. Pension saving can seem complicated and inaccessible for many people, but we should all be doing it as soon as we start working.

Understanding Pension Consolidation

Pension consolidation is a process that can gather up your previous pensions and bring them together. As you move from job to job and change addresses, it can be tricky to manage pensions. With every new one, there’s more admin to deal with.

By combining them, you can have a clearer view of how much money you have for retirement, where it’s invested, and what you’re being charged. This consolidation can simplify your financial landscape.

It’s important to remember that a pension is an investment. Its value can go down as well as up and could be worth less than what was paid in. Pension consolidation won’t be right for everyone.

Managing Your Retirement Savings

Gathering up your pensions could give you a better idea of your overall pension pot and what it could be worth when it’s time to retire. Lower charges are another benefit; you could potentially save on management fees, which can help your pension pot grow faster.

The more pensions you have, the harder it can be to track them and how they’re performing for you. With just one pension, managing your retirement savings becomes much easier.

 

Simplifying Your Financial Future

Consolidating your pensions can provide peace of mind by offering a straightforward overview of your retirement funds. This reduces the administrative burden and makes making informed decisions about your financial future easier.

It’s crucial to stay informed about the value of your pension pot and the different options available to boost your retirement savings.

Taking proactive steps now can ensure a more secure and comfortable retirement.

 

Role of Professional Financial Advice

Obtaining professional financial advice is invaluable when considering pension consolidation. We can provide tailored recommendations based on your unique

circumstances and long-term goals. We’ll help you navigate the complexities of pension schemes and select the right options for consolidating your pensions effectively.

Engaging with us also ensures that you are making well-informed decisions, maximising the potential of your pension savings, and preparing for a financially stable retirement.

At any stage in your career, you may want to determine precisely how much you have saved in your pension and begin managing these funds more effectively. If you require further information on consolidating your pensions or need assistance understanding your options, please contact us for more detailed guidance.

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Source data:

[1] Lloyds Bank research 09.05.24

 

 

Why should someone invest in a retirement plan?

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Portrait of multiethnic couple embracing and looking at camera sitting on sofa.

Pensions may not be the most exciting thing to think about, but they are an essential part of planning for your long-term future. In fact, your pension has the potential to be one of your most valuable assets, even more than your property. It’s something that could make a significant difference to your lifestyle in later life.

When it comes to retirement planning, it’s best to start thinking ahead at least two years before you plan to stop working. To prepare for this next chapter in your life, our handy checklist can guide you through the important choices you’ll need to make to ensure you’re fully prepared for a comfortable retirement.

Today’s savers face unique challenges

Although retirement planning may seem familiar and straightforward, the truth is that today’s savers face unique challenges that previous generations did not encounter. While the basic concept of working, saving and retiring remains constant, there are new factors at play that can complicate one’s retirement savings efforts.

Planning for your retirement means carefully considering whether you will have enough funds to cover your desired lifestyle after you stop working. While you might be eligible for the State Pension, this might not be enough to sustain your retirement goals.

You may want to take early retirement

Additionally, you may want to retire earlier than the State Pension age, which requires additional savings planning to ensure you can afford the retirement lifestyle you envisioned. Careful planning and forward-thinking can ensure that you’ll have the financial security to enjoy your retirement without worrying about money matters.

There are many important things to keep in mind as your retirement approaches.

How can I locate all my pensions?

It’s crucial to determine how much income you’ll receive from all your pensions to properly plan your retirement. If you’ve misplaced any pensions over the years, you can use the UK government’s pension tracking service to locate them https://www.gov.uk/find-pension-contact-details

What is the value of my pension?

Keep track of your pension’s value regularly as retirement nears, ensuring that you’re aware of how much money you’ll have during your retirement phase.

When can I take my pension?

With a defined contribution pension, you can start taking money out from the age of 55, moving to 57 in 2028. However, it’s important to keep in mind that the earlier you start taking money out, the longer your pension will need to last. For those with a defined benefit pension, you can usually begin taking it from the age of 60 or 65. However, if you have a defined benefit pension, you might be able to start receiving an income from it from the age of 55. You may be able to take money out before this if you’re retiring early because of ill health.

How much State Pension will I get?

While it may not be your primary retirement income, it’s worth checking to ensure that you qualify for the full amount. You can quickly do this online through the government’s website https://www.gov.uk/check-state-pension

How much are my other investments worth?

If you have additional investments or savings, such as Individual Savings Accounts (ISAs), it’s important to check their worth as you approach your retirement age because they could supplement your pension.

How do I access my pension?

There are various ways to access your pension, including buying an annuity for guaranteed income, taking lump sums, or combining both. Your decision depends on your circumstances and what outcomes you expect.

What is my pensions investment strategy?

Take the time to analyse your investment approach as you approach your targeted retirement age and see if it still adheres to your risk tolerance. You could discuss potential strategies to reduce your exposure to higher risk investments over time with your financial advisor if you’re planning to receive a lump sum or purchase an annuity.

Seek professional financial advice

Accessing your pension is a critical decision that could impact your income and retirement significantly. That’s why it’s essential to seek professional financial advice before making any decisions.

Planning for retirement is not just about saving money. It’s also about envisioning your future and understanding your lifestyle priorities. By identifying your retirement goals and understanding your income needs, we can help you create a retirement plan that provides for your desired lifestyle and ensures your long-term financial stability. Don’t leave it to chance. Please contact us for more information on our pension planning services.

Important information: This article does not constitute tax or legal advice and should not be relied upon as such. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. For guidance, seek professional advice. A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless plan has a protected pension age). The value of your investments (and any income from them) can go down as well as up, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

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Financial advice when planning retirement

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People who are confident about their retirement are most likely to have specific retirement goals and know what steps they need to take to reach them. But sadly, we see many people do not feel confident that they will have enough savings to live comfortably after they retire.

Many people have a fear of outliving their money, but most don’t have a clear idea of how much money they need during retirement. It’s important to remember that retirement doesn’t happen at a certain age, it happens when you have enough money to live on.

Seeking professional financial advice can help create a clear direction and understanding which will give you peace of mind that you are on the right track.

If you’d like to discuss your retirement, and would like to speak to an expert Financial Adviser, please get in touch:

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Free Guide: Retirement Planning

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There’s no fixed path to retirement or finite end point. Everyone has a different journey through life, with their own experiences along the way, and there’s no need for it to become stressful. You can reduce any anxiety by planning how much you’ll need to retire and working out how best to build up your pension pot.

We have produced a Guide to Retirement Planning to help you navigate the ins and outs of planning your retirement which you can Download Here

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Planning for an early retirement  

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Living life to the fullest and accomplishing long-held dreams. 

It’s common for individuals to either overestimate or underestimate their lifespan. As average life expectancy gets longer, some people may spend over 20 years or more in retirement. 

Early retirement typically signifies reaching financial autonomy before the statutory pension age, usually in the mid-60s. In the United Kingdom, retirees can begin drawing their State Pension at age 66. However, this retirement benchmark is set to increase to age 67 by 6 April 2028. 

Consequently, the early retirement age could be anywhere in your early 60s. Yet, for most, the concept of early retirement begins at age 55, when individuals can start drawing on their personal or workplace pension savings. However, this age is also due to increase to 57 from 6 April 2028. 

Aspects of Life 

During the early retirement phase, the focus tends to be on living life to the fullest and accomplishing long-held dreams. One’s spending might then reduce as activity levels decline, only to surge again later, possibly due to rising care needs. 

It’s common for individuals to either overestimate their health or underestimate their lifespan. As average life expectancy gets longer, some people may spend over 20 years or more in retirement – over twice our grandparents’ duration. Yet, as with many aspects of life, this depends on luck. 

Complex Calculation 

In fundamental terms, full retirement implies that your lifetime expenses should not surpass your income plus any remaining assets, such as savings and investments. This can be a complex calculation in many instances. It will require you to weigh your pension and other income sources against your expenditure and evolving needs as you age. 

Simultaneously, it’s crucial to consider investment returns and inflation, which refers to the rising cost of living. As we have recently witnessed, everyday prices can escalate rapidly, significantly diminishing the purchasing power of a fixed income or cash savings. 

Multiple Factors 

Embracing early retirement doesn’t necessarily translate to a full-stop on professional life. Instead, many individuals transition into more flexible, part-time roles or switch towards volunteering. This shift allows retirees to sidestep less appealing aspects of working life, such as long commutes or stressful work environments while reaping employment benefits. 

Unfortunately, early retirement due to ill health isn’t a choice but a necessity, creating unique challenges for some. Time constraints limit opportunities to plan and build retirement finances. Additionally, careful planning for care and support becomes a priority. Making the decision to retire early is significant and requires thorough consideration of multiple factors. 

To determine whether you can retire early, you will need to assess your financial standing. This means calculating your total pension pots, tracking lost ones and considering other possible income sources or debts. Additionally, you need to envision your ideal early retirement lifestyle and estimate its costs. 

Assessing your Financial Health 

To begin, you need to calculate your total pension pots. This includes private or workplace pensions and any final salary pensions you might have. If you’re considering early retirement, remember that the State Pension won’t be included in this income. 

Reclaiming Lost Pensions 

It’s not uncommon to lose track of pensions over time. The government’s free Pension Tracing Service can assist if you suspect a missing pension but lack any supporting information. Visit their gov.uk website or phone them on 0345 600 2537. Consolidating your pensions might also be a sensible strategy. 

Understanding your State Pension 

Check up on your State Pension to understand how much you’ll receive and when the payments will start. This is crucial for your overall retirement planning. 

Identifying Additional Income Sources 

Consider other potential income sources after retirement. This could include savings and investments, property ownership, or even starting a part-time job or your own business. 

Managing Debts and Loans 

Take stock of any outstanding debts or loans. Consolidating them could potentially expedite their clearance. Set a specific date to pay them off entirely. 

Estimating Retirement Income 

We can help you estimate your retirement income and offer valuable insights into your financial future. 

Envisioning Your Retirement Lifestyle 

Next, plan your essential retirement spending by mapping out mortgage repayments, utility bills and other necessary expenses. Then, envision your ideal retirement lifestyle. What do you want your life to look like once you’ve retired? How much will it cost? 

Factoring in Responsibilities 

Consider any responsibilities that might impact your retirement plans. Will your children still be dependent on you? Might you need to care for older parents or relatives? Are there any other responsibilities you should bear in mind? 

Deciding Where To Live 

Housing decisions are a crucial part of retirement planning. Do you want to stay in the same house, release equity with a lifetime mortgage, move somewhere new, downsize and release some money, or even move to a cheaper region and upscale? 

Estimate Retirement Spending 

Finally, combine all the above factors to estimate your total retirement spending. There’s a lot to consider here. But as you work through it, you might realise that you’re more prepared to retire early than you initially thought. 

If you are considering early retirement and would like professional retirement advice, please get in touch:

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When am I financially ready to retire?

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The earlier you start retirement planning, the better. However, with the demands of managing a busy working and personal life, this is something that can understandably be neglected. But it’s never too late to think about saving for retirement – even if you are planning to give up work in just a few years’ time, you will have options to add to your nest egg.

In our latest video, Financial Adviser Gary Davies discusses how to know if you are financially ready to retire.

If you are considering early retirement and would like to speak to a Financial Adviser, please get in touch:

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