Retirement is a hugely painful and emotional stage in life. Most of us spend the bulk of our existence earning money, and then suddenly we to need to turn off that steady and reliable income stream and live on what we have accumulated. This is an incredibly scary concept. Will you run out of money? Will you be able to even afford to retire? Will you be too worried to enjoy your retirement and end up dying the richest person in the graveyard?
With many of us spending in excess of 25 years in retirement, it should be a time of happiness, new adventures and enjoying the fruits of our labour. But what options do you have?
Future planning is the greatest weapon in your retirement arsenal. Imagine going bowling blind-folded. Yes, you might hit a few pins, but wouldn’t your odds be increased if you could see where you were aiming? Retirement is just like this: If you don’t look ahead now and start to think about the type and amount of income you may need, how will you know if you are going to have enough?
Back in 2014, the then Chancellor announced a huge shake-up to the world of pensions. This meant that pensioners could finally do whatever they wanted with their hard-earned savings, whether that be taking a steady income or drawing the lot as a lump sum.
Flexibility over how and when you draw your pension has many advantages, especially when it comes to protecting your wealth more effectively against tax, estate and legacy planning, and seeking out more suitable investment opportunities. This change in legislation is a huge opportunity for retirees, but with flexibility comes complexity, and the opportunity to make some big mistakes.
As well as taking care of the tax and investment advice needed around retirement, at Efficient Portfolio we use something called ‘Lifetime Cash-Flow Forecasting’, which hypothesises various scenarios, such as drawing 25% of your pension (which is currently tax-free), buying a new house, market crashes and lowered income, and illustrates what these events could do to your wealth. It is by no means a crystal ball, but it does help to identify what planning opportunities could work for you, and what areas you need to improve upon now, so that you could have a more secure future.
We also use this technology to plan ahead for some of the more enjoyable elements of retirement, such as dream holidays and gifts to your loved ones. Filling your retirement with the things you love and having the confidence in knowing that you can afford to them, is psychologically crucial.
Whilst it is not my place to tell you how to spend your hard-earned cash in retirement, I would advocate some careful and strategic planning to maximise your pension pot, minimise your tax, and ensure you don’t run out of money during your lifetime. Retirement is about enjoying the proceeds of your success, and I am all for people ‘front loading’ their retirement by ticking off the bucket list, but much better to do so with clarity on the future and otherwise you are rolling the retirement dice!
If you would like to know more about what options you will have in retirement, why not pop in and see us? We will be open during Oakham’s Christmas Late Night Shopping event on Monday 10th December and will be serving our guests delicious mince pies and mulled wine. Our advisers will be at hand too, to answer any questions you may have about your current or future planning. We look forward to seeing you there.
As you approach your retirement, you can use several strategies to boost your income. Most people make their way through their working life with little strategic planning for their retirement. They collect a series of different pensions and investments, each of which seem sensible at the time but often don’t take into account where they already are or where they are going. To be able to plan your retirement from a financial perspective, you first need to understand what is important to you. Only once you know what is important to you in the future can you ensure your finances can deliver exactly that.
Most people move companies several times during their working life. Each one of these companies will probably give you a different pension, so by the time you get closer to retirement, you will have collected a diverse array of different schemes to your name, which you will drag behind you like a wedding car does cans and streamers. Even those of you who run your own businesses will often have the same as a result of previous jobs, previous financial advisers or encounters with your bank.
Some of the older pensions you might collect may have some quirky guarantees and features that you will want to keep. Guaranteed annuity rates, for example, are usually really valuable, so you’d want to keep most pensions that employ them. Many will offer to pay you an income of 10% or more of the capital when you get to retirement. You are unlikely to be able to beat this through investment growth and are unlikely to get half that rate from buying an annuity from the open market, so you don’t want to let go of this feature.
Some pensions will have minimum growth guarantees. The important thing to do is to check. Ask the provider if you have these guarantees, and if not, you know you aren’t giving up valuable benefits by transferring.
There are also pension charges to take into consideration. There are a whole variety of ways that older-style pensions can charge you. There can be initial charges, exit charges, different units where higher charges are imposed on some but not others, ongoing charges, admin charges, flat charges and switching charges, to name but a few. As you can see, it can be complicated to compare the charges of one pension to another. That’s why you, or a Financial Adviser, need to simplify the process. First look at the effect the charges have on your money by picking a set growth rate (for example, 5%) and seeing what you end up with at age 65 from both schemes. The respective companies will be able to give you illustrations of this data, as long as you know you are comparing apples to apples.
It used to be that all companies provided projections with set levels of growth at 5%, 7% and 9%. In its wisdom, our regulator the FSA (now FCA), changed this to reflect more accurately the growth you might receive for that level of funds. Whilst I understand why this illustration is more useful for the consumer, it also makes it impossible to compare one to another unless you have a degree in spreadsheets!
As a result, we do things slightly differently to simplify matters further. We look at a critical yield when comparing the two schemes. What this means is that we look at whether your money in an alternative scheme has to grow at a higher rate or a lower rate to achieve the same amount of funds. If this is a positive figure, you know that the changes of the new scheme must be higher, and if it is negative, you know the charges must be lower.
Charges are important to assess, but only when assessed with the likely difference in growth can they be quantified. Whilst past performance is no guide to the future, over a five-year time frame or possibly longer, it can be a useful guide. Better, however, is to anticipate what a particular portfolio is likely to deliver in the future.
When it comes to charges, some of these older pensions do not make clear how much money they take off from likely future growth. The biggest culprits are ‘With Profit’ funds, where the company does not indicate the charges and often doesn’t tell you the underlying fund performance unless you do some serious probing. You don’t even keep what growth they manage to get, because they allocate bonuses to you based on the growth. The theory works for the good years they give you most of the growth while keeping some for the bad years and, in effect, trying to smooth out the returns of the stock market.
This theory would also work if you could take your money out unaffected. However, the company can impose a penalty at any level the moment you want to take your money out. This situation is known as a ‘Market Value Adjustment’; if the fund administrators want to impose a 50% penalty on your money, they can. Avoid the smoke and mirrors of the ‘With Profit’ life company funds. It is much better to select an investment level of risk that is appropriate for you than to leave it all in the hands of a company whose sole purpose is to make money for shareholders!
Another question to ask when looking at in these older schemes is, ‘Are you still paying commission to some adviser you haven’t seen for years?’
If you are not getting an ongoing service from an adviser then you should no longer be paying them. You should only be paying for advice and a service if you are getting it, and if you were promised an ongoing service that you aren’t getting, you should put a stop to it.
There are some important considerations to take into account with your old trail of pensions that you drag behind you like the cans behind a wedding car. My recommendation is that you seek the advice of an Independent Financial Planner with advanced pension qualifications because there can be other aspects of pensions that would affect this advice. My hope is that those people who are determined to do it themselves will make better decisions as a result of reading my blog posts.
Either way, assuming you don’t give up valuable benefits or increase the charges more than the likely investment improvement, it is a good financial planning exercise to consolidate your pensions into one centralised solution. This allows you to manage your pension with much greater flexibility and clarity. There are some significant changes happening in the pensions sector. However, in moving to a more modern, online method of pension administration, you have a much better opportunity to improve your investment returns, in part because you will actually notice when you are not improving.
When you have five different pensions, what is the chance that you will look into the performance of each? Pretty small, I would guess. If you have one, you have a much greater chance of keeping tabs on pension performance. Similarly, when you start drawing an income, you can manage your money much better. You can focus more easily on your ‘Financial Freedom Number’, on whether you are on track to have enough or whether you might start to run out.
How should you consolidate your pensions? Historically, people did have five different pensions, maybe eight different ISAs (now called NISAs) or PEPs, and possibly a few Unit Trusts, as well as the odd Investment Bond. This made managing your money a nightmare. You got statements from the providers at different times and, unless you were willing to put in some serious hours or pay someone else to do so, you could not very easily track your progress. You had paperwork up to your eyeballs and so it mostly got ignored. This is why life companies have gotten away with keeping so many people in these closed funds that no longer provide them with a return.
We have managed our clients’ money for the last 15 years through what is now known as a WRAP platform. This can be thought of as a technology platform that provides you with different tax wrappers like the NISA or the pension, amongst others, which then gives you access to pretty much every investment in the open market. Some will also allow you to invest directly into shares, too.
The advantage is that, with the exception of a ‘Necessities Account’ and other cash-based savings such as a ‘Play Account’, a client’s investable money is all in the same place. Furthermore, you can decide on an investment approach and then apply it to all of the different tax wrappers in order to simplify matters. You can log in online and see your portfolio in the same way as you can with online banking and you can monitor your investment returns and clarify for yourself how to draw the income to minimise the tax you pay. You can also perform one vital action on your portfolio that is nearly impossible to achieve when you have multiple accounts: ‘Rebalancing’.
Saving for retirement is a fantastic discipline that you want to be rewarded for during your lifetime, but many of my clients always ask “What happens to my pension when I die?” Does your pension go to a former employer, the state or a life insurance company instead of your loved ones? It might do, but that depends on the options you take at and in retirement. So let’s look at how to ensure your loved ones receive your pension fund.
Generally speaking, with almost all pensions from both companies you worked for and personal pensions you set up, the value of the pension will be paid to your dependents or beneficiaries tax free. The only exception here is the State Pension, which will then be lost. So if you were to pass away prior to retirement, there is less to be initially concerned about. Be sure that you have completed a ‘Nomination of Beneficiaries Form’ for your pension though, so the trustees will know who you want your funds to go to, as your Will won’t influence this money. If you want to avoid it going being lost from the family, you might also want to consider using a Trust to protect this money, but more on that another time.
What happens to your pension after retirement depends on the choices you made at retirement, so we need to look at each in turn.
If your pension was saved up as part of a company ‘Money Purchase’ or ‘Final Salary Pension’, and at retirement you chose to take that income, then your spouse is likely to get around 50% of that income on your death in most, but not all, cases. You will need to check the scheme rules to be sure. If you don’t have a spouse at the point of death, and your children have already flown the nest, then your former employer will keep the money, and your loved ones won’t get any of it.
If you have a Personal Pension, either set up by you or by a company that had a Group Personal Pension, you will have had choices at retirement. These choices will determine what happens on your death. The main choices would have been:
So you can see, the choices at retirement determine what happens to your pension when you die. If leaving the money to your family is important, you either need to purchase an annuity that facilitates this or you need to use ‘Drawdown’.
As an example, Captain Black, who has worked at British Airways all of his life, and, as a result, has a very sizeable Final Salary Pension Scheme that promises him an income of £70,000 per annum. Rather than take this, British Airways will offer the alternative of transferring £2m to a personal scheme of his choice, where he can draw the income as he likes. If he draws this as income from the scheme, and his wife and he die at 3 years into retirement, they may have had around £210,000 out of the scheme. The rest of the funds will be handed back to British Airways, not their family. If however he transferred that benefit to a Personal Pension before he reached retirement, his children would be inheriting the remaining £1,790,000. As you can see, his choices make quite a difference to his loved ones.
There are many factors to consider when making your choices at retirement, and the death benefits are one of those factors. I strongly urge you to seek Independent Financial Advice to ensure you make an informed decision.
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For many of us, the prospect of finally leaving work for good and focussing on the aspects of life they truly enjoy is a wondrous dream. Just imagine it now; leisurely days filled with holidays, quality time with your grandchildren and the ability to embark on whatever whim takes your fancy. Now imagine doing that before any of your peers. Sounds like bliss, but is that even possible? Believe it or not, I can show you how to retire early; the answer ultimately boils down to how prepared you are.
It is a general misconception that those whose retirement is akin to a utopia are wealthy. There may be some truth in this, but actually the people who can afford to live out their final years in comfort are simply financially prepared. I am sure that anyone who regularly reads our articles will know what I am going to say next, but for those who are new to our writing; ‘people do not plan to fail, they fail to plan’. If you are not prepared for the future, how can you expect to enjoy it earlier than expected? However, feeling secure about your future goes a little deeper than just planning, as life has a knack of throwing in the odd unexpected situation. No one knows what is around the corner. So how can you successfully plan for it? Crystal balls may help you to see into the future, but they are not always reliable! What you need is a mechanism that will set out multiple scenarios about what could happen to your money and where that would leave you. I am delighted to tell you that this tool does exist.
You need to look at your future projected costs vs income at retirement to know if you will have enough.
If you would like to know where you are heading financially, and let us be honest- who wouldn’t, Lifetime Cash Flow Forecasting is the tool for you. So, what is it and how does it work? Lifetime Cash Flow Forecasting is a tool that allows you to understand the impact that the decisions you make today will have on your future finances. Essentially, it provides you with a very visual display of how your future finances will look, both from a cash-flow point of view (will I have enough money to pay my out goings) and from an asset point of view (how much am I worth). Not only is every aspect of your finance today taken into account, hypothetical situations are also factored in from your likely future, along with assumed interest, inflation and growth rates. This means it becomes your unique Lifetime Cash-Flow Forecast that best reflects your future and even better, it will show you how much money will need in retirement, meaning that you will be able to see if and how you can retire early.
Once the core Lifetime Cash flow Forecast is built, you can immediately identify years ahead when cash flow will be tight, as well as how your net worth is likely to change throughout your life. Once we have this core model, we can start to look at how changes you can make along the way change your future finances very easily. These ‘what if’ scenarios can be anything, for example ‘what if I need long-term care for 10 years’? ‘What if my daughter needs money for a house?’ Or even ‘What if I want to go on holiday twice as often?’ This tool can factor in endless scenarios, probabilities, likelihoods and demonstrate how they are likely to affect your cash-flow and overall wealth.
One of the greatest examples of how this benefits our clients is in the lead up to their retirement. It helps people understand how much money they will have at retirement, and more importantly, how much they will actually need. No one wants to be the richest man in the cemetery, but you also don’t want to run out of money either and you very often want to leave a legacy to your loved ones. This is a fine balance. Lifetime Cash-Flow Forecasting can often allow people to spend more; not the advice they would normally get from their financial adviser. It also often allows people to take less risk with their investments because they realise that less growth is still going to give them everything they need, with less risk of it going wrong.
Another example may be a client who has to plan for school fees whilst trying to ensure they can enjoy nice holidays with the children when they are growing up. The Lifetime Cash Flow Forecast could show that they can afford to put their retirement planning on hold for a few years and deplete their investments in order to facilitate this, whilst not preventing them from having enough in retirement. This information could be so valuable to the lives of them and their children; certainly more than money could normally buy.
These two examples may seem very different, but they actually deliver exactly the same result; peace of mind and clarity of how today’s decisions will impact their future. Lifetime Cash-Flow Forecasting ensures that you are financially well organised and prepared for any eventuality or unexpected situation. It will also prevent you from running out of money in your later years and make sure that you are taking the appropriate level of risk with your funds. It can also be reviewed as often as you need it to be (typically once per year, but this is not set in stone), so if anything changes, you can immediately see your new strategy and implement the necessary plans.
Lifetime Cash Flow Forecasting is a vital part of sound financial planning. It delivers clarity to your future and allows you to make realistic plans that are in line with your actual life, not a ‘model’ one. Our clients are really reaping the benefits of this tool and feel empowered that they can make more financial decisions on their own. It is also comforting to know that you can look forward to your retirement and completely understand when and how you can retire early.
The first step in achieving your goals is to discuss your current concerns with one of our qualified Financial Planners.
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