Plan for Retirement

A retirement plan built to be flexible, diversified and sustainable over the long-term will withstand periods of short-term volatility and enable you to live the life you want to live.

Everybody wants a retirement which enables them to live out the lifestyle they want without worrying about how it’s paid for. When this is achieved, through strong and flexible financial planning, it can ensure your twilight years are, potentially, the happiest of your life. It also means periods of high inflation and market volatility may not concern you as much about how you’ll pay the bills and sustain your lifestyle.

While undoubtedly helpful, the reality is a State Pension is unlikely to be enough to fund a comfortable  lifestyle in your retirement (certainly according to the Pensions and Lifetime Savings Association retirement living standards data), and you also won’t get it until State Pension age (currently 66). At the heart of successful retirement planning is a good alternative pension, often now taken through drawdowns and underpinned by investments rather than a guaranteed ‘final salary’ pension but with recent improvements in the available rates, a blend of guaranteed and unsecured income is becoming more attractive.

Using drawdown means the value of the pension pot and the income it can generate can go up and also down depending on the performance of your investments. Over the long term, a well-formulated investment portfolio will typically be on an upwards trajectory, meaning the value of your pension grows over time during accumulation or if you withdraw less than pension growth achieved after costs and charges are accounted for. However, investment involves risk and short-term dips are to be expected. When planning for retirement, your Independent Financial Adviser will help you create a plan robust enough to ride through inevitable peaks and troughs in the long term.

Early Planning

While it’s never too late to start building a robust retirement plan, it is undeniable that the earlier you start the better because you benefit from the greater potential for returns to be compounded over the long term. Tax advantages provided by the government are designed in such a way that the sooner you start planning for retirement, the more options and opportunities will be available to you.

“Take advantage of all of the tax advantages and efficiencies that the government provides to incentivise people to save into their pensions,” says Ken McIntosh, Independent Financial Adviser at Ascot Lloyd. “There are charts and graphs published every year by various pension providers that show the longer you leave it, the harder it will be to build a sufficient retirement income. Even a delay of five years can have serious consequences by the time you hit 65.

“As soon as you’re in work, start paying into a pension. Neglecting to do so is like taking a voluntary pay cut, as it means your employer won’t pay into your pension either. The compounding effect of starting early is huge. My daughter is only 11 and we've already set a pension plan for her. We only put in £50 per month but by the time she's 18 it'll already be worth a fair amount. As Einstein said, compound interest is the eighth wonder of the world.”

Sustainable Income

Expert financial advisers build retirement plans to be flexible and diversified, with a strong emphasis on long-term sustainability. Your Independent Financial Adviser at Ascot Lloyd will keep a regular eye on your retirement planning to see when changes might be necessary, including considering whether securing some of the required income would be in your best interests.

“When I visit clients for their annual review, particularly those who have retired, it’s very important to ensure the income they're drawing is still sustainable,” says McIntosh. “If markets are doing well, their pot is growing nicely and the retirement income is sustainable – happy days. But if you’re taking more than the fund is growing, you don't have to be an economist to work out that at some point the money will run out.  The only question is whether that will happen before you die or your beneficiaries no longer have any dependency on it.”

“That's why we do a sustainability check when planning for retirement. If the income is no longer sustainable, we will have to change things. You might have to adjust your risk level, withdraw less money, use some to buy a guaranteed income, or reduce your expenditure.”

Cost of Living

Sometimes during periods of market volatility or high inflation people have a natural instinct to take money out in cash, as it appears safer that way. There are a number of things wrong with this theory. Firstly, nobody knows when the markets will reach the bottom and pick up again, so taking money out crystallises any losses suffered already and creates the difficult position of guessing when to go back into the markets. Secondly, one asset almost guaranteed to lose value is cash, even more so when inflation is particularly high.

“Don't try to time the markets, it's time in the markets that's important,” says McIntosh. “As long as a portfolio is well diversified, without any undue risk, at some point it will get back on track. That’s why financial advisers are so valuable because they understand risk and they know how to diversify and the importance of having an emergency fund or cash buffer if there are unexpected shocks from the markets or life just intervening in your plans unexpectedly. They also recognise when it might be wise to take a fresh look at expenditure.”

When planning for retirement Ascot Lloyd advisers often use cash flow modelling tools which are revisited regularly to reflect any major changes in income or expenditure. Similar to how banks stress test new customers, cash flow modelling enables you to see how sustainable your income is should inflation rise, or your investment portfolio dips to unexpected levels.

Your financial adviser will also review with you the legacy you wish to leave behind if any. A sustainable retirement income might be front of mind, but often people also want there to be a nice inheritance for their loved ones to enjoy once their own short and long-term needs can be met with a good level of confidence.

Tax-free Lump Sum

More often than not, there will be a spike in expenditure in the first few years of retirement, especially if someone has used the opportunity to take a tax-free lump sum from their pension to treat themselves to a dream holiday, a new car, or to make home improvements. These are sometimes called the ‘go-go’ years. Spending then tends to decrease as people settle into their retirement and see the greater importance of sustainability as they could live another several decades. Here ‘go-go’ transitions through ‘slow-go’ to ‘no-go’ when age and infirmity take away your ability, though not necessarily one’s desire, to do things you did when in early retirement.

The chance to withdraw 25% of your pension as a tax-free lump sum (up to a maximum amount of typically £268,275) is an excellent perk of pensions when planning for retirement, though any decisions should be considered carefully. When money is in a pension wrapper, it's very tax efficient. It’s built that way because the government wants to incentivise people to save into their pension so they don’t fall back on the state for benefits when older. Whenever you take money out of a pension wrapper, however, it might be liable to inheritance tax should you die and it be held in cash.

There is a lot of debate, meanwhile, around the merits of taking tax-free money out of a pension pot simply to reinvest it. If, for instance, you take a tax-free lump sum of £20,000 out to make use of your ISA allowance, that could be a good thing. But if you then die suddenly, ISAs fall into the estate for inheritance tax purposes whereas pensions don't under the current rules. This decision is perhaps even more interesting if you are fortunate enough to be able to make use of all of your lump sum benefit allowance and still have funds to spare.

“These are complex decisions,” says McIntosh. “There has to be a good reason to take any money from your pension. If it's to pay off a mortgage, fair enough. If it's for spending, also fair enough, its your money after all, enjoy it, so you need to understand the impact on your future retirement income.

“But if it's just sitting in cash, that's always a danger, as is reinvesting into something else that may not be as tax efficient, those decisions need to be very carefully weighed up. Our job as advisers is to explain very clearly to clients the implications should they take a certain action, so they can make a fully informed decision when planning for retirement.”

If you would like to speak with one of the trusted Independent Financial Advisers at Ascot Lloyd about building a robust, flexible, retirement plan, Please request a call back.