Retirement Planning
Retirement planning takes in a whole range of considerations these days, not just pensions, but lifestyle choices such as continuing working, either part time, or on a consultancy basis, deferring pensions while there is additional income still coming, and longer term investment planning than ever before, because of better health in later years and the improvement in life expectancy.
The last two generations have seen such an improvement in prospects for old age, both in terms of being fit enough to enjoy it and in terms of longevity, that it seems like so long ago that a typical retirement consisted of giving up work at age sixty-five and managing to struggle on to the early seventies, possibly suffering failing health in the meantime. Advances in medical science has meant a considerable improvement in life expectancy, with many people surviving well into their eighties and sometimes beyond. Not only this, but there is an expectation of much better health during that extended time period, so every chance of needing a much greater income to enjoy the wider travel choices and other activities.
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The most important aspect of planning for income in retirement, is to manage the transition from net saver to net spender. When you have been saving for rainy days and for retirement for so many years, it can be difficult to accept that the time has come enjoy the benefits of what you have managed to put away.
When you are working and earning, keeping some of your income back for the future is fine, but when your income reduces to pension levels in retirement, you have to manage on a lot less coming in than before, so it is then time to spend at least the interest to supplement pension income when required.
There is also the question of length of time for investment. This was not a problem in years gone by, when more limited life expectancy meant retirement funds were unlikely to remain invested for tens of years. The bank or building society was a convenient home for savings and the interest was handy for additional income if required.
What of today's pensioners, though, with perhaps twenty or thirty years to look forward to in retirement, are the same deposit accounts still the best option. If you were looking at investment terms when in your thirties or forties, with twenty or thirty years to go to retirement, you would seldom think the time available was too short to take some stock market related risk, but what of the prospect of looking forward to a similar investment period when in your sixties? Clearly any degree of risk would have to be limited, as there will be no additions to the pot to make up for any losses, but some balanced degree of risk may have a place, if greater investment returns would be welcome, and of course, if it suits your attitude to investment risk, which in retirement should be more cautious than it ever was before.
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Personal Pensions Personal pensions are retirement savings plans for individuals to save for retirement. Tax relief is given on contributions and on taking the benefits, one quarter of the value of the fund accrued can be taken as tax free cash. The remaining fund is used to provide an income in retirement, this income being taxed as earned income.
There are options to leave the remaining fund invested and take an income frrom the fund, known as income withdrawal, or drawdown, or the purchase of an annuity.
Some employers arrange grouped or group personal pensions for employees. These are literally just a group of personal pensions, one for each employee. The employer usually contributes to them, often matching the employee's own contribution up to a certain level. On leaving service, the employee just takes his individual pension with him.
Stakeholder pensions are personal pensions with restrictions on administration charges and investment choices. |
Occupational Pensions and Superannuation Schemes These can be grouped together as they are basically the same thing. Occupational pensions are company pension schemes, and they are generally called superannuation schemes when the employer is a public authority, rather than a company.
Traditionally these have been defined benefit schemes, where the employer agrees to pay the employee a certain proportion of salary in retirement, based on years of service, and funds the pension scheme accordingly.
However in recent years the government has been taxing the income of pension schemes which was previously tax free and placing restrictions on how they are funded, which, with increased longevity of members, has made these schemes very difficult for employers to fund. The answer has been to change many of them to defined contribution schemes, which have no defined benefits as a proportion of salary. Instead, they are funded at an agreed level of contribution, in much the same way as a personal pension. |
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Savings  The safest home for savings is in National Savings, the government guarantees your money. However, interest rates are not always the most competitive, as they are determined partly by the Chancellor's need to raise borrowing, as well as the bank rate the competitors' rates for bank and building society deposits.
Don't overlook Premium Bonds as a safe haven for cash. No interest of course, but those with a substantial holding can anticipate a fairly regular stream of prizes to make up for it, and you can withdraw your cash at short notice at any time. |
Investments Building up holdings in ISAs over the years can be a very tax efficient way of providing income in retirement, usually with flexibility to take a regular withdrawal as income, either yearly, or sometimes even monthly.
Remember there is no tax to pay on withdrawals from ISAs, so you don't need to take out quite as much.
Retirement ISAs can be very flexible, as well as switching to less speculative investments when you retire, you can turn income on and off, take lump sums, for holidays and car purchase from time to time, and the remaining capital can be passed down when you are finished with it. |
Retirement
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