Retirement planning has undergone some radical changes over the past 20 years
There was a time when pensions were relatively straightforward, but that has changed significantly in the past two decades.
Final salary pensions are becoming less common and the qualifying age for a state pension has been increased, with pensions expert Malcolm McLean predicting it will hit 66 by 2020. Conversely, people have been given the ability to access their pension funds with greater flexibility.
To do this you, must have an idea of what income you’ll need in retirement and, for the plan to be realistic, you need to recognise that it will vary during your retirement.
For one client Dave Smith, 60, he knew would have to plan incredibly carefully to ensure that the retirement he had fantasised about for years would become reality.
Dave realised that, to get the ball rolling, he would need to have a substantial period of good growth. This is the stage running up to retirement when Dave was still accruing wealth - at a greater rate than at any other time in his life. His children, Andy and Kelly, had left home and got their degrees. They were largely paying their own way in life – barring any naive financial choices.
''You must have an idea of what income you'll need in retirement - and you need to be realistic in your plans.''
Dave was in a senior position in his career, as a Marketing Executive – with the highest salary of his working life. As a smart and savvy man, Dave decided to start making plans for his retirement.
Dave gave up work at 57 - a number of years before the state pension age.
These are the golden years of his retirement. Dave and his wife, Jacqui, realised their ambitions of going on a cruise and visiting her sister in Australia - whilst they were both still fit and healthy. Dave also bought and restored a vintage British motorbike. Fortunately, their outgoings are much lower, with the mortgage having finally been paid off just before he gave up work.
This means that he needs an annual income of £25,000. He has his pension and an ISA, as well as cash savings. Dave will continue working part-time as a Marketing Assistant for his daughter's catering business - which will earn him £8,000 a year.
We advised Dave to make up the difference of £17,000, between his outgoings of £25,000 and his part-time income every year, by using his ISA savings and by drawing £4,500 out of his pension.
That way, he is making full use of his £12,500 annual income tax allowance - which would otherwise be lost. He is also safeguarding his tax-free savings for the future - which will be vital to him. If you don’t use your income tax allowance, you are effectively inviting the taxman to take money off you in the future.
In seven years’ time, Dave will qualify for the state pension of £7,500 a year. He and Jacqui will have fulfilled their greatest – and most expensive – ambitions, but they will most likely still be active, in good health and want to travel.
For this stage in his life, Dave only needs £20,000 a year. However, he will have given up his part-time job, so he can relax after a hard-toiled career. After all, he has worked hard for this. After his state pension, he must find £12,500. Therefore, he will draw £5,000 from his pension - to use his income tax allowance - with the balance of £7,500 coming from his savings.
''If you don’t use your income tax allowance, you are effectively inviting the taxman: 'At some point in the future, tax me on this money’.''
By the time Dave hits 77, he intends to slow down. He and Jacqui will only travel occasionally, will go out less often and have given up driving. So, by then, Dave can comfortably get by with an income of £12,500. All of this can be met from both his state pension and own pension - without paying any tax.
Like Dave, many people can do much more in their retirement years than they may have thought possible. That's if, of course, they plan and don’t just drift into retirement.
You must realise and plan for the fact that your income needs will change as you get older. For the best - and most tax-efficient way - to structure your retirement strategy, you should always seek professional, independent advice. That's where Reeves Independent can really help you.
Reeves Independent is a FCA (Financial Conduct Authority) regulated company - which can be checked by using the FCA register - with over 20 years' experience of offering expert financial and retirement advice.
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Names have been changed to protect identity. These articles are for information only and are based on specific client circumstances which may be different to yours. No advice should be conferred from the articles. No action should be taken without independent professional financial advice as any actions on your pension may be irrevocable and have a big impact on your income in retirement.