Retirement Planning can wait
Retirement Planning Can Wait… ?
A pension is for retirement and possibly of little interest right now, when you’re burdened with the everyday financial pressures of mortgage repayments, utility bills, escalating council tax and settling the tab at the local drinking establishment (perhaps). The state promises to provide a pension on retirement which further fuels this procrastination, but remember, those on the maximum New State Pension are currently receiving less than £9,000 per annum and full-time employees over 18yo on the minimum wage earn more.
There’s a general rule of thumb that suggests people wishing to maintain their current lifestyle in retirement should be saving the equivalent sum of ½ their age from gross income received; for instance, a 40-year-old should seek to contribute 20% of their income to pensions saving. Clearly many other factors apply, and this is therefore only a guideline, but it does help to illustrate the importance of retirement planning and the detachment many have – I know a certain person who’d much rather spend their disposable income on craft beers, vinyl records and bicycles...
The implementation of auto-enrolment has helped to bridge this gap for those in the private sector, with current contribution levels at a minimum of 8% of qualifying earnings; however, where possible, additional saving would be prudent. Darren Philp, head of policy at The People’s Pension (an operator of auto-enrolment schemes) said “15% or 16% contributions are needed” to ensure a suitable ‘replacement rate’ and therefore a suitable standard of living in retirement.
Regardless of the sums saved towards retirement, it is important to make the most of the monies invested and put them ‘to work’ to achieve your long-term goals. Underlying investment decisions and an individual’s life goals are therefore crucial when making pension decisions, and an area Independent Financial Advisers will happily assist with.
Personal pension contributions are ‘grossed’ up by the addition of 20% from the government, obtained by the pension scheme provider. This immediate uplift can benefit from investment returns compounded over the life of the policy and can therefore make a substantial difference to your final pot. Furthermore, if you are a higher rate tax payer, you can shift some of your income out of the 40% [or 45%] tax bracket, and instead pay just 20%, thereby receiving higher rate relief – usually received through Self-Assessment. Pensions are generally accessible at 55-years-old and an investor can usually benefit from a tax-free lump sum worth 25% of the value of the fund.
For those requiring greater flexibility, ISAs can be a useful starting point for saving; where contribution and withdrawal can be made ad hoc. There is generally a wider range of investment options available under an ISA wrapper too. The annual allowance is £20,000 per annum and any investment growth or income received is free from taxation. Versus a pension, there’s less incentive on the ‘way in’ but greater benefit on the ‘way out’. Cue the Lifetime ISA…
The Lifetime ISA (LISA) is renowned as the preferred saving environment for first time house buyers but can also act as a very useful retirement planning tool. Contributions made to these schemes will generate a 25% bonus payment from the government, and the monies can be accessed penalty free at the age of 60 to support retirement (note, this is 5 years later than currently available via Pension). As with any ISA product the investment growth and income are tax free – incentives on the ‘way in’ and the ‘way out’. The maximum annual contribution is £4,000 and attracts a maximum bonus of £1,000 every year. You must be 18 or over, but under 40, to open a Lifetime ISA and contribution ceases when you turn 50 - an account will stay open and your savings will still earn interest or investment returns.
There a many factors to consider when assessing savings options and they can’t all be covered in a brief overview such as this. Essentially, it is never too early to plan for retirement and the options may be broader than you expect; please contact me if you’d like to know more. Note, we hold a free finance and legal clinic at the Watermark Centre on the last Tuesday of each month (2pm ‘til 4pm).