Planning a prosperous retirement

Transcription

1 Planning a prosperous retirement Towry s Guide to Retirement Planning

2 About Towry We are one of the UK s leading Wealth Advisers and specialise in providing high quality, expert financial advice to private individuals, families and trustees. Established over 50 years ago, we have 20 offices across the UK and look after the financial needs of over 25,000 clients. When you seek advice from Towry, you have the reassurance of knowing that all our Wealth Advisers are highly qualified. In fact, the majority have achieved Chartered Financial Planner status, the highest professional qualification in the industry. One important difference of our service is the fact that our advice is Towry s advice, rather than the view of one individual. We achieve this by working as a team, using our wealth advisers, wealth planning and technical financial planning experts, as well as our specialist investment management team. This combined expertise helps to deliver the best possible financial advice to all our clients. What sets us apart from other advisers is that we believe that your financial decisions should be made as part of a lifetime financial plan which is structured to help you achieve your short and long-term financial goals. Any retirement planning strategy should be developed in the context of this wider financial plan. 2

3 Achieving your dream retirement Retirement means different things to different people. For some, it s a time for relaxing or taking a well-earned rest after a busy career. For others, it s an opportunity to travel, spend more time on hobbies or to achieve all the lifetime ambitions still left on their wish list. What s more, in today s modern world, retiring is now often a gradual process. Many choose to slowly reduce their working hours rather than stopping work altogether. Others mix some voluntary work alongside their ongoing professional paid work. Whatever your aspirations, one thing is certain it s very important to plan ahead. Having a plan is crucial Many people move into retirement with little or no idea of whether they have sufficient money to fund the lifestyle they dream of. Deciding on the type of retirement you want well in advance is therefore vital the sooner you start planning ahead the better. This retirement guide is designed to give you an overview of some of the main challenges of planning for retirement and how you can overcome them. It also considers how to establish whether you are prepared for retirement or not and looks at the ways to make your savings work harder for you both before and in retirement. It is important to bear in mind that this guide will only give you a broad outline of the areas you need to consider prior to and in retirement. We believe getting expert professional advice can make all the difference to whether you achieve your goals or not. One of our Wealth Advisers can work with you to put together the right retirement plan for your particular circumstances. 3

4 Retirement planning three important considerations Even if you have a plan for your retirement there are many things that are often overlooked. Three of the main considerations are increasing longevity, health and inflation. These factors, if overlooked or ignored, can seriously impact your finances in retirement. 1. Longevity People are living longer today than ever before. Life expectancy at age 65 in England and Wales has now reached 18.2 years for a man and 20.8 years for a woman 1. Increasing longevity is great news for us all, however, this presents the real danger of your money running out before you die. Of course, you cannot predict when you are going to pass away but planning for a retirement that may last well over 20 years is a sensible approach. 2. Health As we all know, the likelihood of getting seriously ill increases with age. Unfortunately, this may mean that you have to enter into longterm care at some stage of your life. Long-term care can be very expensive the average annual cost of a room in a care home is now estimated at 28, The Government has announced plans to introduce a lifetime cap on personal contributions to long-term care costs currently expected to be around 72,000. However, it is anticipated that this cap may only apply to healthcare costs and so may well exclude other costs such as those for accommodation and food. 3. Inflation Inflation can be a considerable problem for retirees, especially for those on fixed incomes. Inflation diminishes the true purchasing power of an income over time but its long-term effects are often underestimated. Inflation, as measured by the Consumer Prices Index (CPI), was relatively low in 2013 at around 2% 3 (the CPI measures the price increase of a basket of goods and services). 1 Office for National Statistics, Interim Life Tables, England and Wales, March Prestige Nursing + Care, average cost of care home per year, August Office for National Statistics, December

5 Rising prices may actually have a greater impact on retirees than the official inflation figure suggests. This is because the elderly typically spend a disproportionate amount of their income on items that are prone to higher inflation, such as utilities, food and fuel. It is fair to say that the cost of living typically rises more quickly for retirees than for the population as a whole. The graph below illustrates that even a low inflation rate can substantially eat into the buying power of your retirement income over the years. The impact of inflation 60,000 50,000 40,000 30,000 20,000 10,000 0 Value at 0 years Value at 5 years Value at 10 years Value at 15 years Value at 20 years Value at 25 years 5

6 How might your retirement pan out? Of course, no one knows for certain how long they might live and whether they have enough assets to see them through a comfortable retirement. However, a very effective way of building a broad understanding of what your retirement might look like can be through a lifetime cashflow analysis. A cashflow analysis looks at all your assets, any income and planned expenditure. It can also build in inflation and assumptions on investment returns (based on your attitude to risk). An illustration is then produced which gives you an idea of when your money may run out. It also provides you with a good understanding of whether you need to save more for your retirement or if you have already saved enough. In essence, it s designed to give you a good indication of whether your plan for retirement is achievable or not. An example lifetime cashflow is shown in the chart opposite. This scenario shows an individual, Mr Smith, building up his assets until he retires at age 65. Slowly but surely his assets are spent as he goes through retirement. It indicates that Mr Smith s assets are likely to run out at around age

7 Will you outlive your money or will your money outlive you? 600, , , , , , , , , , ,000 50, , , , , , , , Age (years) A lifetime cashflow analysis needs to be undertaken with the help of a trained financial adviser who has experience of performing this type of analysis. At Towry, we specialise in providing this service to our clients. If you feel you could benefit from this perspective on your retirement plans, please contact us. Protecting those that matter One area many people overlook when planning for retirement is protecting themselves or their loved ones from the impact of a serious illness or an early death. Prior to retirement gaining protection is generally more straightforward. Life assurance, income protection and critical illness products tend to be more affordable. However, as you get older, the cost of protection products may become prohibitive and the surviving spouse may have to live off their assets to see them through their retirement. Again, we can help you look at this through a cashflow analysis. This will show you how you or your spouse might cope financially on the death of one of you. This might assume, for example, that one of you passes away at age 55 or 60. The analysis will then show how this impacts the finances of the surviving partner. 7

8 Saving for your retirement How much you save for your retirement will obviously have a huge bearing on whether you are able to achieve your dream retirement or not. The amount you put aside will invariably depend on your personal circumstances and your priorities at any given time. However, no matter how much you are saving, it s important to invest as tax efficiently as possible. This is because sheltering your investments from tax can significantly boost your returns over the longer term. The taxman provides UK residents with many generous allowances which can be used for saving for retirement. We have highlighted some of the main ones here. Pensions Pensions will form the bedrock of most retirement savings plans. This is because they are highly tax efficient. Tax relief is given on your contributions (up to certain limits) and your pension investments can grow free from income and capital gains tax. There are also benefits when you reach retirement you can typically take 25% of your pension fund as a tax-free lump sum. Additionally, if you die before taking benefits from your pension, there is normally no inheritance tax liability for your beneficiaries. It is important to remember that you cannot usually take benefits from a pension until you reach the age of 55 (in most cases you cannot gain access to your pension savings before this age). However, on reaching this age, you don t have to retire in order to start taking benefits. Any income you receive from a pension at any stage is taxable. 8

9 Individual Savings Accounts (ISAs) ISAs can be particularly valuable to retirees. This is because they can deliver a tax-free income (pension income is taxable). ISAs do not offer the same tax benefits as pensions when contributing but returns are free from both income and capital gains tax. Another attractive feature of ISAs is that you can access your capital at any time, although the tax benefits will be lost forever when you cash them in. Additionally, ISAs form part of your estate on death. Each individual has an ISA allowance of 11,880 in 2014/15 (rising to 15,000 on 1 July 2014). Capital Gains Tax (CGT) allowance The CGT allowance is frequently overlooked by many individuals. However, it can be an extremely useful allowance, particularly for people with sizeable portfolios of non-tax wrapped investments. An individual can realise gains of 11,000 in 2014/15 without incurring CGT, which can then be reinvested or spent as appropriate. The type of investments you hold within your various retirement savings accounts will depend on a number of factors, including your attitude to risk, capacity for loss and how close you are to retiring. Getting the right mix of investments for your own personal circumstances is extremely important and Towry can help put together an appropriate investment strategy for you. Pensions contributions your allowances If you are under 75, you can normally contribute up to 100% of your annual earnings and you will be entitled to tax relief on these payments (up to the annual limit) If you have any unused annual allowance from the previous three tax years, you can potentially invest more than the annual limit by taking advantage of the carry forward rule Non-taxpayers can contribute 2,880 each year and the government tops this amount up to 3,600 The annual limit for tax relief on your total contributions, including those from your employer, is 40,000 for 2014/15 There is a lifetime allowance on the value of all your pensions, which is 1.25 million for 2014/15. A tax charge of up to 55% is payable if you exceed this limit. 9

10 Generating an income in retirement As we have already mentioned, the nature of retirement is changing. Encouraged by the Government s phasing out of the default retirement age, many individuals are now choosing to work into their 70s and even into their 80s. As a result of increasing life expectancy, the age at which the state pension is paid is also gradually being increased over the next few decades. This means retirement is now not necessarily a one-off event for an ever-growing number of people it is becoming more of a gradual process. An individual may well choose to slowly reduce the hours they work over a number of years while increasing the hours they enjoy outside of work. Gradual retirement makes it more important for individuals to know and make use of all the available tax allowances when planning their income. This is because the effective use of tax-advantaged products can provide you with much greater flexibility. The chart opposite gives an example of how gradual retirement can work. It shows how an individual s employment income gradually reduces and is replaced by a mixture of pension income and income/capital from nonpension assets such as ISAs over time. 10

11 Utilising different sources of income through a gradual retirement Employment income Non Pension Assets (such as ISAs) Pension The mix of different sources of income will, of course, vary according to an individual s needs and circumstances. If you are considering utilising a similar strategy through your retirement, we recommend you seek advice to establish the best approach for you. Taking an income from your pensions Unless you are lucky enough to have a Final Salary pension scheme, you are likely to face a choice at retirement of how to generate an income from your pension savings. The two options you have are purchasing an annuity or entering into what is known as income drawdown. Annuities An annuity is normally bought with the proceeds from your pension scheme and it will provide you with a guaranteed income for life. An annuity will probably be the most appropriate option for the majority of individuals (at least in part). There is a wide range of single life annuities available in the UK and options include: A level annuity which pays the same level of income to you for life An increasing annuity which provides some protection against inflation (although the starting income will usually be lower than that of a level annuity) An impaired annuity which pays a higher income to those with health issues One of the drawbacks with single life annuities is that they normally die with you (an annuity does not form part of your estate on death). The exception to this is if you have purchased a joint life annuity, which pays an income to a surviving spouse or partner for the rest of their life. Once you have bought an annuity you cannot usually change your mind. Choosing the right one for you is therefore very important and we recommend that you should seek advice before making a purchase. 11

12 Income drawdown Drawdown is a more flexible way of taking a retirement income. You take an income directly from your pension fund and the level of income can be varied to suit your needs (normally within a certain limit). However, your income isn t guaranteed and so drawdown is normally only suitable for individuals with larger pension pots. One of the main attractions of income drawdown is that your funds remain invested and so you can still potentially benefit from investment growth. This means there is greater potential for your pension income to keep pace with inflation, although this will depend on the investment returns you achieve and how much income you withdraw each year. However, this also means the value of your pension fund can go down. Income drawdown can also be used to delay purchasing an annuity (annuity rates typically improve with age, although this isn t guaranteed). As with an annuity purchase, drawdown allows you to take a 25% tax-free lump sum on retirement. However, an income does not have to be taken at the same time if you opt to take the lump sum. There are also greater options for passing on retirement savings on death with income drawdown (subject to a potential tax charge). There are two different types of drawdown available capped and flexible and the features of both methods are highlighted below. Income drawdown is usually only appropriate for certain individuals and so taking advice is very important if you are considering this route. Please note that regular reviews are normally required if you enter into an income drawdown arrangement. The government has announced that it is consulting on adding further flexibility in relation to withdrawing income from pension. Any changes are expected to be in place in the 2015/16 tax year. Capped versus flexible drawdown Capped drawdown You can take an income up to approximately 150% of the alternative annuity that your pension fund could have purchased Flexible drawdown This option is only available to individuals with a secured income of 12,000 pa (from state pensions, annuities and, in most cases, occupational pensions) There is no minimum income withdrawal requirement You are required to review the maximum income you can take every three years up to age 75 and annually thereafter You can withdraw as much or as little income as you like from your pension pot (you can withdraw the whole amount or nothing at all if you so choose) 12

13 The best of both worlds Another option open to you is to use some of your pension fund to purchase an annuity while utilising income drawdown for the remainder of your pension pot. This can provide you with a certain level of guaranteed income through the annuity purchase which is boosted by income taken through drawdown. Phasing your retirement Income drawdown can also be used within what is known as phased retirement. With this strategy your pension fund is divided into lots of separate pots or segments. You then gradually release or take the different income segments over time enough to provide you with sufficient tax-free cash and taxable income each year while the remaining segments stay invested. You also have the option of just taking the tax-free lump sum element from each segment while taking no income at all. One of the main attractions of this approach is that death benefits are maximised. The uncrystallised segments of your pension (the segments where no benefits have yet been taken) will be paid tax free to your beneficiaries in the event of your death before age 75. The crystallised segments can also potentially pass to your beneficiaries through income drawdown, subject to a possible tax charge. It is also possible to phase your retirement through a series of annuity purchases. 13

14 Reviewing your plan A retirement plan should never be set in stone as individual circumstances and tax allowances can and do change. Investments and their performance should also be frequently assessed. As you approach retirement, for example, it may well be appropriate to switch more of your investments into safer, more secure assets. Regular reviews of your plan are therefore very important we recommend once a year. The information in this brochure is based on our understanding of proposed and current tax legislation. Whether any tax will be payable, at what level it is charged and whether you qualify for tax relief will depend upon individual circumstances and may be subject to change in the future. This document is solely for information purposes and is not intended to be, and should not be construed as investment advice. 14

15 Next steps This guide has been designed to give you a broad picture of what you need to consider when planning for and on reaching retirement. Retirement planning is very important, especially for people with complex affairs, and we recommend that you seek regular advice from a highly-qualified adviser. To arrange an initial discussion with a Towry Wealth Adviser, call or visit

16 Towry Limited Towry House Western Road Bracknell RG12 1TL If you would like to know more about Retirement Planning, please get in touch to discuss how we can help you. Call or visit Towry Limited is authorised and regulated by the Financial Conduct Authority. TA1450