Start the new decade with a new bill of wealth
At every stage in our lives, there are certain circumstances that stand out as important, but it is all too easy to put off planning in our earlier years. We have highlighted some of the important stages in life and the circumstances you might find applicable to your particular situation.
20 to 30 somethings
Delaying the start of your retirement savings could have a significant impact on the level of retirement fund you eventually accumulate. When you’re in your 20s to 30s, retirement may seem a long way off. However, the reality is that if you hope to save a fund large enough to provide you with an income equivalent to two-thirds of your final salary, you would have to save nearly half your income from your 20s until you retire.
Understandably, you may be reluctant to tie up your money in a fund that may not be touched until the age of 55. So while pensions offer the benefit of tax relief, which will help your savings grow even more over the long-term, other investment vehicles such as Individual Savings Accounts (ISAs) can provide more flexibility, as you have access to your money should you need it urgently in the future.
You may also be happier to take more risk with your investments at this stage, as you have more time to make up losses on the way.
During this decade, you should plan to put as much as possible into your pension. You may find that you can lock up more of your assets now, so it is worth discussing with us the option of switching your ISA holdings to your pension provision to benefit from your higher rate of tax relief. It may also be appropriate to consider using a wider range of assets, but the difficulty will be trying not to be too cautious with your savings at this stage.
Many people may be coming to the end of a mortgage, with children leaving home. The final decade before retirement is often the most important from an investment perspective. At this point we can advise you how you could build even greater levels of diversification into your retirement funds, including money held in non-equity assets.
These might be cash deposits, bonds or other fixed-interest securities such as government gilts. This is also a good time to request a state pension forecast, so that you can get a reasonable idea of what this form of income could be in retirement.
Now may be the time that you are considering significantly reducing your risk. You may be deciding whether you need to secure a fixed income, or if you can withstand any investment volatility after you have retired.
If you need certainty now, you could buy an annuity with your pension savings, although you do have the option to take 25 per cent of your pension fund as a tax-free lump sum, perhaps to reinvest elsewhere.
Another option is to consider an unsecured pension (formerly income drawdown). You leave your pension invested, but receive an income from the fund. However, you must be absolutely certain that you are happy with the additional risk. This stage of life is not a time to take risks with your retirement fund.
Most people will be required to use their pension savings to buy an annuity by the age of 75. When it comes to buying an annuity, there is a vast array of options. You can choose to inflation-proof your annuity, or buy a guarantee so that it continues to pay out for at least five years. You might also want an income to continue for your spouse after your death.
All these options will reduce the amount of income you receive initially. Generally, the older you are, the higher the income you will receive.
We can help you search for the best annuity rate on the open market – you should never just take the rate offered by your pension provider. In your 70s, you are more likely than not to qualify for an enhanced annuity rate or ‘impaired life’ annuity if you are unwell or have a poor lifestyle. There are also some alternative means of getting the most out of your pension at this age, so why not contact us to find out how?