There’s no escaping the fact that we’re all getting older. The more years that go by, the more our thoughts turn to our future; not only do we want to be able to provide for our family, but we also want to enjoy our hard-earned retirement without having to watch the pennies.
Radical pension reforms have brought retirement planning into the limelight. Whilst it could be easy to get carried away and think about drawing down a big lump sum when you retire, there are a number of things to consider before you make any plans for your cash.
With statistics from Unbiased1 suggesting that only 18 per cent think they are financially on track for retirement and an estimated £2.9 billion of tax relief on pensions being wasted every year due to poor retirement planning, it really is never too early to get the wheels in motion.
Here are our five top tips on planning for your retirement.
Look at the bigger picture.
With great power comes great responsibility. Pension reforms have given us all much greater powers and flexibility with our retirement funds. Before you go ahead and buy that sports car, have a think about what you want to achieve with your money over the short and longer term. You may want to think about whether you will move house, or if you want to leave money to your children/family members. All of this will help to build up a bigger picture of the money you have available, what you will need to hold back and therefore what you might need to draw down.
Rethink your budget.
According to recent statistics, many people of working age are underestimating their life expectancy; therefore running the risk of pension pots drying up during retirement. Life expectancy is climbing at an alarming rate; with the average age predicted to reach over 100 by the middle of the century. In order to effectively plan for such longevity, it is sensible to take a proactive approach to pensions and investments at an early stage.
Think about the tax implications.
Don’t forget that any draw downs you make on your pension now will have tax implications. Drawing down large amounts of cash from your pension pot could pull you into a higher tax bracket or cause loss of personal allowance and it might therefore be more tax efficient to draw down smaller amounts over a number of years instead.
Also remember your NISA allowance – you can save up to £15,240 in NISA’s in current tax year (2015/16). This can be invested into one type of account (Cash ISA or Stocks and Shares) or you can split the allowance across both types, up to the maximum NISA limit collectively.
Everybody’s financial situation is different; as are the goals and objectives they have for their future. Financial advice is almost impossible to generalise as what might work for you could be completely inappropriate for the next person. A such, you should make a plan that is tailored to your individual needs. If in doubt, seek advice from a recognised Chartered Financial Planner to ensure you are receiving the highest standard of information.
Consider Inheritance Tax.
Alongside the above mentioned implications for drawing down from your pension, it is also important to remember that up to a certain age, untouched pensions can now be passed on to loved ones tax free; making them a useful vehicle for passing wealth on to the next generation. Any funds drawn down from a pension that have not been spent will automatically become part of your estate – which could be taxed at 40 per cent if the total estate exceeds the IHT threshold.
As a chartered financial planning firm, Gresham Wealth Management can offer advice on all aspects of retirement planning.
For more help and advice on financial planning, investments, or wealth management, please contact us.
NB. The value of investments can fall as well as rise. You may not get back what you invest.
The Financial Conduct Authority does not regulate tax advice.