Ten top tips on planning for retirement
As pensions and planning for retirement remain a top concern for consumers, over a third (38%) of all searches for an independent financial adviser on unbiased.co.uk, the professional advice website, are for advice on personal retirement planning. Whether you are just beginning to consider your pension planning or you're about to retire, unbiased.co.uk brings you ten top tips on how to plan for your retirement.
1. Danny Cox, Hargreaves Lansdown
"In some cases, the ‘mist' surrounding pensions puts people off not only saving into pensions, but saving altogether. This is a big mistake - if pension products aren't right for you, there are lots of other good alternatives, including a tax-free ISA (Individual Savings Account). In the absence of any savings, if you were retiring today your income from the state could be around £132 a week (2010/11). This is just about sufficient to rent a one bedroom flat in Bournemouth, leaving nothing for bills or food.
"In reality, at retirement most people have an income from a number of different sources, including their state pension, company pensions, private pensions, ISAs, and perhaps even property. Diversify your retirement savings to avoid having all your eggs in one basket. However, don't be too quick to dismiss pensions: the tax relief on contributions is very beneficial, boosting an £800 contribution to £1,000 even if you are a non-taxpayer. If you have the chance to join an employer's pension scheme you should do so otherwise you risk missing out on free money."
2. Jaskarn Pawar, Investor Profile
"A pension is not the only option when saving for retirement. Planning for retirement is about working out what you want to do and how best to afford this lifestyle. In funding your retirement the ultimate goal is to create an income stream, nothing more, and nothing less. Where this income comes from is entirely up to you. Many people rely on pension plans from various sources - personal, employer, the State - to deliver the income they need in retirement. However there can be other, more flexible ways to save.
"ISAs are perhaps the next best alternative. They provide a similar tax efficient environment for your assets to grow over time. Importantly though, they do not restrict you in the way and when you eventually draw your income on retirement, and do not tax any of the money you take out. The £10,200 annual contribution limit is unlikely to be needed by the majority of people. For wealth preservation and inheritance tax purposes the money remains very much in your control over time and even through retirement. So if you did want to gift some of the money to reduce your inheritance tax liability, you could."
3. Ian Hudson, Hudson Green & Associates
"Retirement planning is the most exciting process you will ever go through. It is basically about wealth creation for the future. The only problem with the future is that it seems so far away, which is why most young people don't do any of the planning. The smartest ones, however, do. And the best thing about saving for the future is that the younger you are, the more time you have in which to grow your pot of money. The crazy thing about making retirement plans is that you can do whatever you like. It's up to you how you save for the future, be it a pension plan, art collecting, second homes, third homes....the list goes on.
"Two fundamental facts remain, however, whichever path you choose. 1. You have to start saving in one form or another (failure to start is a failure - full stop) and 2. Take advice; getting independent financial advice is crucial in turning good decisions into great ones. So don't delay planning for your retirement, because one day of delay is one less day for your plans to work."
4. Jason Witcombe, Evolve Financial Planning
"The trick is to be clever about pension contribution levels and make an annual decision. If your income is in the 20% tax band, it will cost you £8,000 to get £10,000 into your pension after basic rate tax relief. Higher rate tax currently starts at £43,875. So, if you wait until your income is £53,875, getting £10,000 into your pension only costs you £6,000 as you get 40% tax relief. Therefore, if you are a 20% taxpayer now but anticipate a promotion in the next few years, it may be worth considering delaying pension contributions.
"If your income is in the bracket £100,000 to £112,950 you effectively get 60% income tax relief because you lose your income tax Personal Allowance at a rate of £1 for every £2 of income over £100,000. Therefore a £10,000 pension contribution only costs you £4,000! Once income is over £150,000, income tax is at 50%. There are some onerous restrictions for High Income Individuals but it is still possible to secure 50% tax relief on a certain level of pension contribution. The more tax relief you can get, the harder your contributions will work for you."
5. Amanda Davidson, Baigrie Davies
"Planning ahead is important in all areas of finance but none more so than with retirement planning. When you're young, retirement seems a long way off, but putting small sums away over a long time will pay dividends. It's never too early to start.
"When within 10 years of retirement, this is when it becomes a reality and serious planning should take place. Often a jumble of pensions has been built up with little cohesion. Taking control of the various plans and making sure the mix is right is important. Finding out whether the total sums are enough for retirement and working out what you will need in retirement are daunting calculations, but better done now than on the verge of retiring.
"At retirement, all investments need to be pulled together to make sure the plan is as tax efficient as possible and that the best use of them is made. Here is the time that capital turns to income on a regular basis and when funds should work as hard for you as you have for them."
6. Ashley Clark, Need an Adviser.com
"Consider switching your pension funds into lower risk/low volatility funds or if available and the markets are volatile, cash funds, a few months before you are due to retire. Do not be greedy and wait to try and get extra growth. Many stock market and other market linked funds such as managed funds are volatile over a short period, we have seen between 10% and 20% swings in fund values over just a few weeks in 2010. Losing 20% of your fund value just before you are due to retire may mean you are locked into a pay cut for the rest of your life or you have to wait a few weeks, months or even years for your fund to grow back to its original fund value. Also, many people do not realise that you have to physically put a claim in for your State Pension to start. The Pension Service does not just write to you and ask you when you want to take your pension, you must claim it."
7. Chris Wicks, Bridgewater Financial Services
"At retirement, if you have any form of money purchase pension (e.g. personal pension, stakeholder pension, executive pension) it is very important to shop around for the best annuity rate when you retire. In addition, enhanced rates are available for people who smoke or have poor health. The range of conditions is fairly wide so it is always worth having this assessed by arranging for an IFA to submit an impaired life annuity quote request on your behalf. There is a standard form which is accepted by all of the major players and this will quickly determine whether you qualify for an enhanced rate."
8. Dan Clayden, Clayden Associates
"Retirement planning should not just be all about funding and while there's no doubt that paying more into a pension will not do any harm to your retirement plans, it's not just the size of your pension pot that's important...it's what you do with it that matters!
"Considering the retirement options available is rather surprisingly overlooked by many, with about a third of people failing to shop around for an annuity on the 'Open Market' where they may get a better deal than from their current pension provider. This is even more shocking when you consider the fact that annuity rates have nearly halved over the last 15 years. This means that if you were to retire tomorrow at age 65, you would need a pension fund nearly twice the size that you would have needed 15 years ago in order to retire on the same amount of money. And this doesn't take into account how pension fund values have been affected by falling stock markets or the increasingly common trend of employers replacing final salary pension schemes with defined contribution arrangements.
"But a standard annuity isn't the only way of drawing an income from your pension - you might be able to qualify for an enhanced or impaired health annuity that could increase your retirement income depending on your lifestyle and medical history. Alternatively an investment linked annuity or drawing an income directly from your pension fund via USP (Unsecured Pension) might be more appropriate for your circumstances.
So make sure that you seek advice from a suitably qualified independent financial adviser who can help you review all of the options available to you and make a recommendation that suits your individual needs."
9. Lorreine Kennedy, CareMatters
"Anyone planning for their retirement should consider both pensions and ISA's as a way of preparing for the time when they no longer receive an income from employment. The use of Investment Bonds can be a useful part of retirement planning - especially if you are a higher rate tax payer when you invest in the Bond and a basic rate tax payer when you come to take the benefit. If you find yourselves struggling financially do consider alternative ways of boosting your income. These include downsizing your property, renting a room out (the income from the rent a room scheme is ‘tax free' up to £4,250) and finally Equity Release."
10. Bob Bullivant, Annuity Direct
"Before considering unsecured pension (drawdown) ensure that you obtain details of the critical yield, which is the annual return required to enable income to be withdrawn each year at the same level as the annuity you can buy today. The critical question to ask is if the annuity used to do the calculation, as the critical yield can change depending on the type of annuity compared to, is on an open market basis and is specific to you if you have a lifestyle or medical condition."
Karen Barrett, Chief Executive, unbiased.co.uk comments: "When it comes to complex financial areas like pensions and retirement planning, one of the most fundamental and valuable steps you can take is seeking professional and qualified advice from an independent financial adviser (IFA). A discussion with an IFA is a good way to ensure you are planning effectively for your retirement and get your financial affairs in order. An IFA will work directly with you in order to choose the right pension and retirement plan for your individual circumstances and give advice on products from across the whole market. Consumers should take action now and can carry out a free and confidential search on unbiased.co.uk's ‘find an IFA' service to find an independent financial adviser who can offer invaluable advice on the best way to save for retirement."