As you approach retirement, looking after the money you’ve worked hard to put away is important if you’re going to look forward to the future with confidence. Dedicating some time to reviewing your financial health today could ensure your savings see you through.
Reaping the harvest of your investments
• If you’re in a defined benefit or final salary pension scheme, check the projected benefits. Most schemes will pay a tax-free cash lump on retirement plus a guaranteed income based on your salary at the time of leaving. Ask your pension administrator for details or visit their scheme website if there is one.
• If you’re in a workplace defined contribution pension, personal pension or SIPP, check you’re on track for the level of retirement income you require. Your provider should send you annual statements and most schemes provide a secure website for members where you can experiment with different scenarios such as the impact of increasing your contributions. If it’s a workplace scheme, check also that you’re making the most of your employer’s contributions. Most employers will match your contributions on a pound-for-pound basis up to a certain point. And remember, you might want to review your investment – if you’re nearing retirement, high risk funds might not be the best bet, given that your savings have less time to recover from any loss in value.
• If you have several pension pots, perhaps from previous jobs, consider consolidating them into one scheme which could make it easier to manage your money. This can make it easier to start exploring your at-retirement options too as you can make a decision about the whole pot, rather than piecemeal.
Your other savings and investments
• You can use your ISA savings to avoid taking pension savings that are potentially subject to tax. And if you’re a high earner and have already maxed out on your pension contributions or hit the lifetime allowance, Stocks & Shares ISAs are a great way to save on your savings by sheltering any returns from income or capital gains tax.
• Tot up the value of your ISAs and review your funds. Have you made the most of your ISA allowance this year? If not, remember you can invest in ISAs via a lump sum or by regular monthly savings up to a maximum of £20,000 in the current tax year. If you’re already invested, it could be time to think about spreading your risk and diversifying your investments. Do you know what you really own and what would happen to your portfolio if markets took a dip?
• You might want to factor in other savings such as bonds and deposit accounts. You could have some inheritance money in the offing. You may have rental income from a holiday home or buy-to-let property plus whatever state pension you’re entitled to. It could all add up to a bumper crop.
Planning for retirement
To help you think about your retirement finances and plan your strategy, here at Legal & General we talk about a ‘four pots’ approach to later years’ finances. There’s increasing talk of the 100-year life while life expectancy for men is currently about 79 and for women it’s 83 ¹. So there’s plenty of life for the living. And once you reach 65, life expectancy goes up to 87 and 89 ² respectively.
1. Initially, there’s the money you need for your active retirement years when you’ll be taking holidays, enjoying your hobbies and indulging in leisure activities
In the active years, your money could be invested for growth to provide a regular monthly income. Typically this means equity-based investments where the potential for growth is good but it does come with a level of risk. For some, a diversified approach is preferred and a fund that maybe includes some commercial property and government bonds too.
2. Then come your later years when you’re perhaps less active and may require greater security.
In later years there may be a requirement for home care services or residential care fees when a guaranteed income from an annuity might provide valuable peace of mind.
3. Then there’s money for special treats and rainy days.
Money you might need as occasional lump sums for holidays, new cars, home improvements, emergency care and leisure activities could be held in cash funds giving you some potential for growth but avoiding the risk of a dramatic fall in value due to stock market volatility just when you need it.
4. And finally money for the kids’ inheritance or a favourite charity.
Money earmarked for inheritance or legacy could be invested in higher risk funds to increase its potential for growth.
Don’t forget about tax
Key to effective financial planning is ensuring you’re not paying unnecessary tax.
When you come to take your pension, the first 25% of your money is usually tax free. The rest will be taxed as earned income (tax rates can vary, basic rate is 20%). Your state pension is taxable too. So spreading your tax-free pension cash over the years can help you keep your tax bill to the minimum.
The value of your investments can fall as well as rise and is not guaranteed. Tax and allowance figures are as at April 2019. Tax rules can change and what any change could mean for you would depend on your individual circumstances.
Please note the information, data and any references in this article were accurate at the time of writing. Please check the date of the content if you’re looking for up to date investment commentary or tax-year related information.
¹ Office for National Statistics 2015-17
² British Medical Journal