Retirement planning involves structuring your assets in the right way as to enable you to have the right amount of money at your disposal at the right time. Indeed, retirement planning can be one of the most challenging elements of managing your wealth and arguably the most important.
How much you should put aside, where to put that money, how much income you can secure and for how long are all important questions.
Accumulation
Within the accumulation phase of retirement planning, pensions can offer a very attractive tax benefit with investments in pensions free of tax and providing tax relief on contributions (up to your annual pension allowance). This essentially means that that the Government top up what you pay in with automatic 20% at the basic rate, while higher-rate taxpayers can claim a further 20% and additional rate tax-payers another 25%.
Typically, you can put as much as you earn each tax year into a pension, up to a limit of £40,000. However, those with total annual earnings over £150,000 have their annual contribution allowance tapered down (by £1 for every £2 of income) to a floor of £10,000 for those earning £210,000 or more.
Importantly, it is possible to carry forward any unused annul contribution allowances (from the preceding three tax years), although advice should always be taken in such instances. It is also very important for higher-earners to note that there is a lifetime contribution allowance which stands at £1.055 million for the 2018/19 tax year and is indexed to increase annually in line with the Consumer Prices Index.
Whilst the above describes contributions, having your pension funds correctly invested is of equal importance. Your wealth manager will be able to devise and offer a range of strategies depending upon your identified target amount and risk profile.
Historically, this tended to involve an approach that reduces the level of investment risk taken as they individual nears retirement. Known as the “lifestyle approach”, meaning that the composition of investments alters as individuals reach pre-set ages by de-risk the pension fund with age.
At Macdonald Wealth we take a more personalised approach by first identifying how much money you will need and setting this against a sensible estimate of your lifespan. This will underpin your appropriate investment strategy and build your retirement fund in turn enabling you to sustain your lifestyle for a realistic period.
Decumulation
Current regulations allow individuals to access their pension fund from the age of 55 with the first 25% of your pension to be tax free with the remainder being taxed at the individuals marginal rate of tax.
Also, individuals now have the flexibility to choose from annuities, income drawdown and lump sum withdrawals or a combination of all of these.
Income Drawdown enables the individual to have the remainder of their funds invested and potentially generate returns for further income. In addition, with more retirees choosing to carry on in some kind of employment means that retirees will need to make finely balanced decisions about the size of any lump sums and the timing and manner of entering drawdown.
Alternatively purchasing an annuity will appeal to those who prefer the security of having a guaranteed income from their pension pots. Indeed, it is possible to use a combination of drawdown and annuity to fund your retirement requirements.
By taking income from the individual’s pension this will be taxed along with any other income and so retirees could find themselves pushed into a higher income tax band, so staggering withdrawals over periods could be more tax-efficient
Finally, although you may know how much you require to fund your lifestyle inflation is another important factor, having your wealth manager devise a retirement strategy to prevent your income from being eroded from inflation can be an absolute necessity.
What is evidently clear is that with all this freedom comes a great deal of risk, on the one hand retirees will certainly not want to stint themselves during their golden years, yet on the other the thought of running out of money in old age can be a terrifying prospect for most people.
Knowing which route to take will rely upon a range of factors such as your stage of life and health, your financial obligations, the plans you and your family have and your overall tax position, most would agree that taking professional advice before making any irrevocable decisions can be essential to their future plans being achieved.
Pensions and Death Tax
Depending on the nature and type of the pension scheme, upon death, while one might not exactly relish the thought, those who die before age 75 will be able to bequeath pensions free of tax to their nominated beneficiaries, therefore keeping a lot more of their wealth within the family. The pensions of those making it past 75 will be taxed at the beneficiaries’ marginal rate of income. It is, therefore, quite conceivable that a pension fund could pass down a number of generations giving each the opportunity to draw an income as required.
This can be useful where income generation is not the main focus, for instance. It may be the case that the individual has large sums of money and little need of additional income therefore wealth planning and preservation for future generations, along with perhaps mitigating Inheritance Tax is their main focus.
Overall, what is clear is that retirement planning can be a particularly complex area of managing your wealth and one where it is easy to make very costly mistakes. Having an intelligent retirement plan and investment management strategy in place can give you great peace of mind and ensure that you are able to live life to the fullest in retirement.