Retirement Planning Service

Retirement planning is a very topical subject in the financial press. There are worrying stories in the press almost daily about saving for retirement and how urgent it is for us all to provide for our futures. With what is deemed by many to be meagre financial support from the government, the importance of careful and well laid plans has never been more crucial. Yet many of us still do not have a properly defined plan to aim to get to live the lifestyle we want when retired.

Why save for retirement now?

The basic state pension for a single person or a married couple really is only sufficient to provide an existence living and there is much speculation as to whether benefits will still be available when future generations retire.
In order to calculate your required retirement income, you will need to calculate your expected expenditure.
Inflation can have a significant effect on your purchasing power. You also need to consider taxation, as both Income Tax and Capital Gains Tax could affect your income in retirement. Also, delaying taking action even by a couple of years can have a significant impact on the amount you will receive when you reach retirement, especially if you would like to take early retirement.

Investment Risk

Investment return and risk are closely correlated. The more risk taken the higher the potential returns, but of course, the higher the potential negative returns also. Generally, the more risk taken, the more volatile the investment will be. In order to maximize investment performance and reduce the associated risk, a diversified retirement ‘plan’ may consist of a combination of asset types, including equities, gilts, corporate bonds, property and cash.

Once your attitude to risk has been defined, you would then determine the types of asset that mirror your risk profile, and also what percentages you would invest in each asset type.

The way that one diversifies risk is by investing in different asset classes, and then in different sectors of the economy – for example, in services, financials, manufacturing companies, retail etc. One can also diversify risk further by investing in different geographical regions other than the United Kingdom. By definition, investing in countries outside of the United Kingdom is higher risk, as one must take into consideration the effects of currency exchanges. Generally, Emerging Markets, the Far East, China and Japan are considered to be higher risk than the United States or Western Europe. The Value of your investment and income may fluctuate due to investment performance and foreign currency fluctuations.

At Wealth Matters, we use different risk modelling tools to ascertain your risk profile, which takes into consideration a number of details including your age, your requirement for income or growth or a combination of the two and your intended retirement date.

Your options for retirement planning

There are a number of vehicles that you can use to plan for retirement. Each has advantages and disadvantages, so it is always important to talk to a financial planner to identify the one(s) which best suits you.
To help you decide on the right vehicle, you should ask yourself the following questions:

What is your attitude to investment risk?
At what age do you want to retire?
What other existing investment do you have and/or assets?
What income do you want to retire on and how do you want to take the benefits when retired?

The main retirement vehicles you can use

Pensions – both personal and company

Pensions are an important part of any retirement plan and offer generous tax advantages which make them an ideal long term savings vehicle. Pension simplification and hybrid schemes also now offer more flexibility in what you can invest in and how you can take the benefits at retirement.

Equities

Equities (stocks and shares) can be bought as discrete shares or through “collective” funds and companies via Unit Trusts, Open Ended Investment Company (OIEC) and Investment Trusts. These investments can also be held within tax efficient wrappers such as ISA’s and Unit Trusts, each offering their own benefits.

Fixed Interest

This type of investment is a lower risk asset class than equities and could form part of a balanced portfolio. It includes Treasury Stock (Gilts), Corporate Bonds and cash on deposit.

Property

Due to the high transactional costs associated with property, this type of investment is often best suited to a long term strategy, which of course can blend well with retirement planning. It is generally considered a lower risk asset class than equities and can potentially provide both income and capital growth.

Understanding SIPP’s

Sweeping changes in pension regulation took effect on 6th April 2006. This day was known as A-Day. The rules have re-ignited interest in pensions and specifically SIPPs (Self Invested Personal Pension) which offer wider investment options and more flexibility.
There are many benefits to using a SIPP over and above a traditional pension plan as they provide increased choice in terms of investment strategy and options available to you pre and post retirement age. They are however more expensive than traditional stakeholder pension plans, so the benefit must be weighed up against the cost.

So what are the main advantages of a SIPP?

Investment choice

The primary benefit is the investment choice available, which is almost unlimited. You can choose any Unit trust, Investment trust, OEIC, or direct share holding, allowing you to cherry pick a portfolio of funds from various investment houses. It also allows you to hold traded endowments, commercial property, PIBS (permanent interest bearing shares), Loans, Futures and Options, etc. In fact, the list is potentially endless.
Of course, the investment must be legal and permitted under HM Revenue and Customs rules, but the choice is huge. The main benefit of holding any investment within a pension wrapper is that it will grow virtually free of income and capital gains tax. If you have a large property portfolio, it might also be a very attractive proposition. It is crucial to understand both the advantages and disadvantages of holding commercial property within your pension, before making any decisions, as it will not be suitable for everyone. The rules to borrowing have become less flexible, because since April 2006, you can now only borrow 50% of the net scheme assets when buying commercial property.

Flexibility at retirement

At retirement you can elect to take 25% of the pension fund as tax free cash and then choose to draw an income from the pension pot, while leaving the balance to be invested and hopefully continue to grow. This is called ‘income draw-down.’ You might want to do this if annuity rates are low at your chosen retirement date, so rather than committing to a bad annuity deal, you can draw an income from the pension fund without actually having to buy an annuity. You can always do this at a later date, when the prevailing annuity rates are hopefully better.
You can take your 25% tax free cash and decide not to draw an income at all. This will benefit those that intend to continue working after taking their tax free cash. When you reach age 75, after A-Day, you will still not have to buy an annuity. Instead you can continue to draw an income from your pension using what is called an Alternatively Secured Pension or ‘ASP’.

Death Benefits

The death benefits are arguably better with a SIPP than an ordinary annuity. After taking benefits from the SIPP, using income draw-down, you can elect for the rest of your fund to be paid on death to a nominated beneficiary as a lump sum minus 35% tax. If you compare this to an annuity, on death with no guarantees, the life insurance company keeps the fund.

Levels and bases of, and reliefs from, taxation are subject to change and their value depends on the individual circumstances of the investor.