Investments | 22 August 2022

The golden rules to retirement planning: Piecing together the pension puzzle

In the second of our retirement series, we look at what you need to do to fund the lifestyle you want when you retire.

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Over the next decade the number of people set to retire will hit a record high, rising to over 800,000 people a year by 2028, according to a 2021 report by the Resolution Foundation. The pandemic has also prompted a growing number of people to consider retiring earlier than they initially intended. But how many people are financially prepared for their post-work life?

A 2021 Saltus Wealth Index found that 92% of high-net-worth individuals underestimated how much money they need in retirement. As Paul Bray, an Executive Director with Coutts Specialist Advice Services says: “There’s an assumption that your lifestyle will carry on into retirement, so achieving that target means replicating your income. But often the potential to spend money is even higher when you aren’t working.”

So where should you start?

What you want vs what you need

The first piece of the puzzle is assessing what your future expenditure might look like. Lifetime goals don’t stop when you retire, if anything it’s often the best time to pursue those dreams you’ve always had, whether that is travel, new ventures, or charitable endeavours.

A good way to look at it is in terms of essential expenditure versus discretionary expenditure. Calculating how much money you will need to maintain your lifestyle on a day-to-day basis and a separating it from one-off big purchases you might consider.

Of course, you also need to consider how much of your wealth you want to leave behind. Whether you’re planning to help your children get onto the property ladder or support your grandchildren with educational expenses, wealth succession will impact your retirement pot. The same is true for your philanthropic ambitions. If you have plans to start or continue charitable work or set up a family foundation, you will need to factor this into your retirement planning.

Making the most of your pension

While this may seem like an obvious first step, maximising your pension pot is one of the most tax efficient things you can do. “The bottom line is you need to maximise pensions because the benefits are so immense. You get tax relief for your highest marginal rate and then that money rolls up in a gross environment,” says Paul.

The pension annual allowance limits how much you or your employer can contribute to your pension pot to £40,000 each tax year. While the lifetime allowance on how much you can build up in pension benefits over your lifetime while still enjoying the full tax benefits is currently £1,073,100. This allowance applies to the total of all the pensions you may have.

Alongside making the most of your pension contributions, you should consider consolidating any pensions you have. By bringing all your pensions together you have a single point of focus from which you can have a unified holistic pension strategy. It gives you more control over the risk profile of your pension investments and means lower administrative fees.

Longer-term investible wealth

Pension planning is, of course, likely to be only one part of your retirement income. As Paul points out, “pension planning is probably not going to enable you to retire on the lifestyle that you’ve become accustomed to, so you will need to start to take advantage of other investments”.

You should assess what your potential asset structure could look like and the different options you have to build out your balance sheet.

  • Utilise your ISAs – like your pension, always make sure you are utilising your ISAs as they are incredibly tax efficient. For example, if you take out a Lifetime ISA, the government will give you a bonus worth 25% of what you pay in, up to a set limit, every tax year.
  • Assess your investment risk profile – how diversified is your personal portfolio? As you get closer to retirement, it makes sense to look at your risk-return parameters. At Coutts, you can speak to your private banker, who can facilitate access to professional advice so that you can align your investments to be appropriately structured in the way that is best for you to meet your lifestyle requirements and for passing on to your family.
  • Consider your property assets – There are two areas to consider here: Are you considering downsizing your main residence on retirement, possibly releasing a tax-free capital sum, and do you intend to pass this in part or wholly on to your children? Secondly, do you retain any investment property or holiday homes and what potential income might you generate from these?

“Building a clear picture of your retirement is about reflecting on the outcomes you wish for in terms of your own lifestyle needs,” Paul says.

But it is not a puzzle you need to solve on your own. At Coutts, you have access to a portfolio of professional skills, including chartered financial planning specialists. We have the professional knowledge and experience of advising clients like yourself to help you determine the best way to fund the lifestyle you want when you retire.

  • What you want vs what you need

    What you want vs what you need

    The first piece of the puzzle is assessing what your future expenditure might look like. Lifetime goals don’t stop when you retire, if anything it’s often the best time to pursue those dreams you’ve always had, whether that is travel, new ventures, or charitable endeavours.

    A good way to look at it is in terms of essential expenditure versus discretionary expenditure. Calculating how much money you will need to maintain your lifestyle on a day-to-day basis and a separating it from one-off big purchases you might consider.

    Of course, you also need to consider how much of your wealth you want to leave behind. Whether you’re planning to help your children get onto the property ladder or support your grandchildren with educational expenses, wealth succession will impact your retirement pot. The same is true for your philanthropic ambitions. If you have plans to start or continue charitable work or set up a family foundation, you will need to factor this into your retirement planning.

  • Making the most of your pension

    Making the most of your pension

    While this may seem like an obvious first step, maximising your pension pot is one of the most tax efficient things you can do. “The bottom line is you need to maximise pensions because the benefits are so immense. You get tax relief for your highest marginal rate and then that money rolls up in a gross environment,” says Paul.

    The pension annual allowance limits how much you or your employer can contribute to your pension pot to £40,000 each tax year. While the lifetime allowance on how much you can build up in pension benefits over your lifetime while still enjoying the full tax benefits is currently £1,073,100. This allowance applies to the total of all the pensions you may have.

    Alongside making the most of your pension contributions, you should consider consolidating any pensions you have. By bringing all your pensions together you have a single point of focus from which you can have a unified holistic pension strategy. It gives you more control over the risk profile of your pension investments and means lower administrative fees.

  • Longer-term investible wealth

    Longer-term investible wealth

    Pension planning is, of course, likely to be only one part of your retirement income. As Paul points out, “pension planning is probably not going to enable you to retire on the lifestyle that you’ve become accustomed to, so you will need to start to take advantage of other investments”.

    You should assess what your potential asset structure could look like and the different options you have to build out your balance sheet.

    • Utilise your ISAs – like your pension, always make sure you are utilising your ISAs as they are incredibly tax efficient. For example, if you take out a Lifetime ISA, the government will give you a bonus worth 25% of what you pay in, up to a set limit, every tax year.
    • Assess your investment risk profile – how diversified is your personal portfolio? As you get closer to retirement, it makes sense to look at your risk-return parameters. At Coutts, you can speak to your private banker, who can facilitate access to professional advice so that you can align your investments to be appropriately structured in the way that is best for you to meet your lifestyle requirements and for passing on to your family.
    • Consider your property assets – There are two areas to consider here: Are you considering downsizing your main residence on retirement, possibly releasing a tax-free capital sum, and do you intend to pass this in part or wholly on to your children? Secondly, do you retain any investment property or holiday homes and what potential income might you generate from these?

    “Building a clear picture of your retirement is about reflecting on the outcomes you wish for in terms of your own lifestyle needs,” Paul says.

    But it is not a puzzle you need to solve on your own. At Coutts, you have access to a portfolio of professional skills, including chartered financial planning specialists. We have the professional knowledge and experience of advising clients like yourself to help you determine the best way to fund the lifestyle you want when you retire.

READ OUR FIRST ARTICLE IS THIS RETIREMENT PLANNNG SERIES:
WHERE'S THERE A WILL THERE'S A WAY.
 

Read more about financial planning with Coutts or for more information, speak to your private banker.

 

To have a Coutts Invest pension, you must be over the age of 18 and under the age of 75 and be a UK resident for tax purposes. You cannot make contributions if you are a US citizen or US Green Card holder. You cannot access your pension benefits before the age of 55. Eligible pensions only. Fees and charges apply.

Tax reliefs referred to are those applying under current legislation which may change. The availability and value of any tax reliefs will depend on your individual circumstances. Advice and product fees may apply.

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