Our aim is to land you safely in destination retirement with the level of income you ideally need to maintain your chosen lifestyle.
At some point most of us will stop earning – usually because we reach a certain age but sometimes owing to poor health. We work with our clients to quantify the pension and investment funds needed to generate desired future income levels. Each year we appraise our progress towards the target.
Your plans should match the reality of your future. It is no longer likely that you can rely upon one lifelong employer to provide a guaranteed, increasing pension between 60 and 65. It follows that it is vital that we all take time to take a peek at our own projected retirement position.
First we need answers to the following questions:
- When would you like to stop working full time?
- What level of income are you as an individual due to receive from your existing pension arrangements and the state pension?
- From what ages is this income payable?
- If you are in a couple, what is your joint retirement position, and how is pension income apportioned between you?
- What does your ideal retirement look like?
- How much will you need to live on in retirement?
Having established the above we are in a stronger position to make plans. It may be that you need to start putting more cash aside, and the longer you have before that key birthday arrives, the better because TIME is the most important ingredient in financial planning.
Earlier retirement and greater life expectancy present a financial planning challenge – how do you make your resources last for many years yet maintain your standard of living?
Many people aspire to retiring before the state pension age – facing a potential funding gap of up to 10 years or more. The earlier we retire the smaller our pensions are likely to be. Reduced pensions mean a greater reliance on other sources of income such as capital from investment portfolios and the use of property.
We can use a process called ‘Lifetime Cashflow Modelling’ to answer questions such as “how long will my capital last?” and “what does my financial future look like?”
This is a time for considering the next generation, perhaps making gifts to cascade wealth and reduce estate value. It is also important to be aware of the potential costs of long term care and ensure personal financial security.
Options In Retirement
You may take some of your most important decisions at retirement, setting your income streams for the rest of your life. It follows that this is a time when expert advice could add significant value to your affairs. We look at all options to generate the income that you need from your chosen retirement date as this is definitely not a time when “one size fits all”. Here at Eldon we have particular expertise and experience working with those with more complicated personal circumstances or with specific requirements.
Company sponsored schemes
The traditional ‘final salary’ scheme puts the responsibility for income generation in the hands of the employer, where the years worked and remuneration at retirement are relevant to the size of the pension and any tax free cash sum provided. These schemes are all but closed in the private sector so as time progresses we will see fewer and fewer retirees with these benefits. The public sector superannuation schemes continue in this format but they too have been changed to reflect our increased lifespans and the cost of buying pensions. You may well have choices to make with regard to the amount of ‘tax free cash’ taken versus the size of the pension from a final salary scheme, so take advice on this.
It is now common for people to belong to “money purchase” schemes. These are arrangements whereby the employer and employee drop money into a bucket with the employee’s name on it and at retirement the bucket is tipped up and emptied. The value is used to buy an income for life (generally an annuity) and very often, provides a tax free lump sum as an option. The new auto enrolment schemes are money purchase arrangements.
You can have your own personal arrangement into which your employer may or may not contribute, and if you are self-employed you have to shoulder full responsibility for your retirement funding. Again this builds a pot of money which can be accessed from age 55 under current rules. Building up a meaningful fund requires commitment and discipline, balancing ‘living for today’ against ‘providing for the future’.
Annuity not for you?
Annuities come in different guises and it is imperative to understand your options before committing to an annuity as this cannot be changed after the event. In some circumstances it may be appropriate not to buy an annuity straight away but to ‘draw down’ from the pension fund itself in retirement. For this strategy to work you definitely need to involve a Financial Planner with appropriate expertise committed to a long term future service, as these arrangements need careful ongoing monitoring.
There are other ways to generate income in retirement such as from an investment portfolio, property rented out, or continued working. Your health and appetite for personal involvement in the management of your affairs are key to the long term success of these strategies.
Saving for Retirement
Today’s young-at-heart pensioners are increasingly taking on new challenges and exploring far flung places. This enthusiasm means that we expect income in retirement to fund increasingly active and diverse lifestyles.
Despite the bad press and subsequent mistrust of ‘pensions’ this is the most usual form of accumulation for retirement income, and the structure and favourable tax treatment makes pensions still a first choice for most people.
The foundation has historically based been on provision from employers, with some personal contributions and our state pensions in addition. The demise of the ‘final salary’ pension scheme has put the onus firmly on us as individuals to plan our financial security in retirement.
“Time” is a crucial factor, so the earlier we start the better. It’s too easy to concentrate on the here and now which makes it an increasingly uphill task to build up sufficient funds. The message here is a firm “Don’t delay!”
The new national pension scheme – auto enrolment- will see workers included in a pension scheme to which all employers must contribute as well as just about every employee. This will have modest beginnings so initially at least it shouldn’t be relied upon as the sole income stream in retirement. It is a start however, and will bring funding for retirement into focus for all workers; even the ‘one man band’.
You can still set up your own pension arrangements in addition to employer sponsored schemes. The scope to contribute has been reduced over recent years but is still more than adequate for most people. Deciding how much to pay in should be based on affordability, individual tax status and an understanding of the fund that is required at retirement to provide enough on which to live.
There are major changes to the state pension coming in in 2016 when a flat rate will be paid to all those who have 30 ‘qualifying years’ at state pension age. It’s a good idea to check your own entitlement well ahead of retirement to give time to boost the state pension if appropriate.