Retirement Planning Guide

Living your best life in retirement, without worrying about how it is paid for, can ensure these are the happiest, most fulfilling years of your life, but achieving this requires careful planning.

Retirement is a hugely important part of our lives when, after many years of work, we are finally gifted the time to sit back, enjoy life and focus on the things we really love to do.

Even those lucky enough to enjoy their job can experience moments of longing for that monumental day when they no longer need to work. Expectations about when that day will come tend to peak in the earlier parts of our career. A Goldman Sachs survey found that 25% of Gen Z workers, who only recently started working, expect to retire before age 55.

Of course, as life happens and reality sets in, these optimistic expectations can deplete somewhat. In a study in which the IFS asked individuals aged between 40 and 54 when they expect to retire, the average response was 65 for men and 64 for women. To retire when you want and with the lifestyle you desire, you need a long-term robust plan which you stick with.

Early retirement planning

The misconception that retirement planning is only for older people will almost certainly knock your retirement expectations off course. When done most effectively, financial planning starts when your career begins and evolves with you through your adult life.

The incentives to save into a pension are significant. For many employees their employer is legally obliged to pay at least 3% of their qualifying earnings (between £6,240 and £50,270) into a pension. The employee contributing 5% from pre-tax earnings, so achieving a tax saving, or 4% from post-tax earnings with the Government adding1% essentially a basic rate tax credit. Opting out is akin to leaving money from your employer on the table that you could have had. The tax relief on pension contributions is currently very favourable, pegged at your income tax band (often called your marginal rate). This is a government incentive, which you turn away if you opt not to contribute to a pension.  This set up means that those who pay higher rates of tax actually benefit most but a pension contribution can often help address the tax traps for higher earners caused by losses of personal allowances or child benefit where effective rates of tax can be as high as 60% despite the headline rate being no more than 45% for additional tax rate payers.

The biggest incentive, however, is the potential for long term compound growth, which will be more beneficial the earlier you start saving. Contributing the minimum total amount of 8% of your qualifying earning, can amount to substantial sums by the time you reach retirement age, though it is still unlikely to be enough to fund a comfortable retirement, so contributing more if you can would be highly worthwhile. The Association of British Insurers has suggested a more realistic amount of 12% in should be phased in between 2025 and 2023 seeing employers putting in 6% but whether that will align to the policy of the new government remains to be seen.  In a study by Aviva, two-thirds of over-55s wished they contributed more into their pension at an earlier stage.

Retirement Goals

A successful retirement also requires considerable thought into what you actually will do in retirement. While we all tend to like to have a retirement age in mind, far fewer people consider their lifestyle goals in retirement, beyond simply not working. The top reason that people want to retire early is simply to “enjoy more freedom”, according to a study by Aviva.

Most of us strive to retire earlier than the State Pension age, currently 66, but have you considered what you’ll do in retirement? Answering this is key to making early retirement a reality.

“When I ask my clients this question, they tend to say travel, activities with grandchildren, new hobbies, and visiting places they've never had time to visit. In essence, a lifestyle that could likely be more expensive than the one they live now, but without a full-time working salary to help fund it,” says Rudy Smith, Independent Financial Adviser at Ascot Lloyd.

“Any retirement plan should start by asking about your goals. People tend to be very focused on getting to retirement but not so much on the lifestyle they want to have in retirement. Actively defining these goals is essential to understanding how much you will need to save to achieve that lifestyle, and only from there can we build a plan and set out financial targets to get there.”

Retirement Planning with Ascot Lloyd

Knowing how much money you’ll need in retirement is impossible without first defining your retirement goals. The Pensions and Lifetime Savings Association produce some useful research to help people visualise what different lifestyles might cost in retirement. Yet in a report commissioned by the Department for Work and Pensions, only 23% of 40-75 year olds said they have a very good idea of the income they will need.

An Independent Financial Adviser can be very helpful firstly in helping you understand and define your retirement goals. Only then can they translate those goals into the likely sum you will require to achieve that retirement and, most importantly, a plan to make it all a reality.

After establishing your retirement goals, your financial adviser will design a personalised retirement plan based on your current financial situation and retirement aspirations. Of course, circumstances can change, so your adviser will regularly review your retirement plan and make any necessary adjustments to ensure you stay on track to reach your objectives.

Ian and Linda were in a similar position to millions of others when they were approaching an age where they’d like to retire but didn’t know when they would be able to and whether they would have enough to achieve their desired lifestyle. They had some money invested but it was “messy” and they felt it was “just sitting there” rather than being made to work for them.

When Linda was urged by a colleague to attend a retirement seminar, she enjoyed a presentation from Rudy so much that she approached him for advice. In a follow-up meeting, Rudy went through all of their finances with them, including outgoings, debt, attitudes to money and, crucially, their ideal goals for retirement. Armed with this information, he built them a plan.

“We wanted something that was going to grow and we could access,” says Ian. “We know now our children can get that money rather than it being stopped as soon as we pass away. In terms of our investments, we have absolutely seen a return. The fact we see Rudy every year and can talk to him whenever we have questions, that's what we wanted out of the whole thing.”

Linda adds: “Obviously it's a business relationship but it feels like a friendship.”

Cashflow Modelling

Ascot Lloyd has sophisticated cash flow modelling tools which calculate how much income you’ll need in retirement, and its Independent Financial Advisers have the knowledge and experience to help pots grow, but a clear picture of your retirement goals must come first.

Start by creating a list of the things important to you as you get older, and your Financial Adviser will be able to build it out from there. When the time comes, your Financial Adviser will then work with you to put in place a sustainable income plan taking into account your State Pension, drawdown options from any private pensions and alternative income sources.

Early Planning Benefits

Compound interest growth is a very powerful thing which you should seek to use to your advantage by planning for retirement as early as possible. Delaying paying into a private pension for just ten years, for instance, could leave you having to pay in twice as much for the rest of your life to catch up to how much you could have saved had you started a decade earlier.

You should also seek to use tax reliefs the government promotes specifically to encourage people to save for retirement. They are designed in such a way that the sooner you start planning for retirement, the more options and opportunities will be available to you.  If your employer matches additional contributions to even a limited degree, these are also worth taking advantage of as far as you possibly can within your annual allowance of £60,000 (24/25 tax year). Retirement might be far from your mind in your 20s and 30s, but it’s the best time to start planning for it.

“Our role as financial advisers is to ask searching questions to find out what their goals are and then show what they need to do to achieve them,” says Rudy. “We bring that together with the allowances they may not even be aware of. Whilst giving them advice, we also show them how to effectively get discounts from the government through tax relief on investments and pensions. Often there are also pensions they've forgotten about or didn't know they had so we can find them, simplify them if needed and, often, make much more efficient use of their existing savings.

“A lot of people underestimate what they need to save to achieve their ideal retirement but some people also overestimate. One client was surprised and delighted recently when I told him he'd already saved what he needed to achieve his lifestyle goals in retirement. As soon as possible, have a conversation with your Financial Adviser to understand what retirement you want and set out how you can afford it. And then we can help you work towards achieving your goals.”

Ascot Lloyd’s Independent Financial Advisers can help you identify your lifestyle goals for retirement and create a plan to achieve them. Book a callback to start a conversation.