Retirement planning has changed over the past 20 years
There was a time when pensions were relatively straightforward, but retirement planning has undergone some radical changes over the past 20 years.
For one thing, final salary pensions are becoming less common and the qualifying age for a state pension has been pushed back. On the other hand, people have been given the ability to access their pension funds with greater flexibility.
''There are many benefits with the new pension environment, but it does call for some planning.''
To do this, you have to have an idea of what income you’ll need in retirement and, for the plan to be realistic, you need to recognise that that will vary during the course of your retirement. We’ll look at the four key stages of retirement for one client, Dave.
1. Growth stage
This is actually the stage running up to retirement, when Dave is still accruing wealth and at a greater rate than at any other time in his life. His children have left home, finished university and are finally largely paying their own way. He is in a senior position in his career with the highest salary of his working life. During this period, Dave is making his retirement plans and saving.
2. Pre-state pension retirement stage
Like most people, Dave gives up work at 57 - ten years before the state pension age.
These are the golden years of his retirement. Both fit and healthy, he and his wife Jacqui can realise their ambitions of going on a cruise, visit her sister in Australia and he can buy and restore a vintage British motorbike. Fortunately, their outgoings are much lower, 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 ISA and cash savings and he will continue working part time which will earn him £8,000 a year.
Our advice to Dave is that he makes 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 when he will need them. 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’.
3. State pension stage
When he’s 67, Dave qualifies for the state pension of £7,500 a year. He and Jacqui have fulfilled their greatest – and most expensive – ambitions, but they’re still active and in good health and still want to travel.
So now, Dave only needs £20,000 a year, but he has given up his part time job. After his state pension, he has to find £12,500, so he draws £5,000 from his pension (to use his income tax allowance), with the balance of £7,500 coming from his savings.
4. Old age stage
At the age of 77 Dave is slowing down. He and Jacqui only travel occasionally, they go out less often and have given up driving. So, now Dave can comfortably get by with an income of £12,500. All of this can be met from his state pension and his own pension without paying any tax.
Like Dave, many people can do much more in their retirement years than they may have thought possible, as long as they plan and don’t just drift into retirement and allow for the fact that their income needs will change as they get older. For the best and most tax efficient way to structure your retirement strategy, you should always seek professional, independent advice.
This example using Dave is a fictitious example, however it demonstrates how a flexible retirement strategy can be used to meet a clients varying needs through retirement. Your needs may differ and income requirements may be affected by things such as long term care needs so careful planning is key.
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.