When should we start planning for our retirement?

September 9, 2020

The honest truth here is probably sooner than we are planning to. Subconsciously I think it’s something that is always on our minds but the sooner we get a plan together and start investing for our futures, the better potential for investment growth we have.

The longer the investment period, regardless of the amount and what type of investment it is, the better the compounded interest result will be. In my opinion, we should all have a money plan for today and tomorrow, without forgetting the longer term future. We all become accustomed to our lifestyle, is it worth the risk of not being able to continue as we are used to into our retirement, just because we didn’t take advice and plan early enough?

So, what types of things should we be classing as retirement planning? The natural obvious one here is pensions. Pensions get a real mixed bag of reviews. I think people have had good and bad experiences and don’t fully take advice before completely ruling one out...a pension is the only form of investment that is going to allow you to claim money back from the tax man. Yes you heard it, THEY give YOU money back from income in which you have already paid tax on or relief on income that you are due to pay tax on. Win, win right? Depending on your income tax bracket, will depend on the amount of relief that you will be eligible to claim but the basic standard is around 20%. Do you know of any other investments that would guarantee you to recoup that type of saving? It doesn’t exist! Pension planning doesn’t stop for those that are generating an income, non-employed people are also allowed to claim basic rate tax relief, but with a different annual allowance. I touched on this earlier in the week in one of my posts. For a non employed person or a child, you are able to make an investment into a pension of £3600. This amount invested would actually only cost you £2880, no brainer! *note, we are unable to access our pensions until age 55, but saving into a pension for our children will allow them to feel less financial pressure as they go through life. Not only is it a great to save for their futures, it is also very educational by way that they get to understand the different tax advantages that their pension is offering them. I should also mention here that parents and grandparents are the only family members who are able to make contributions on behalf of children. This can be a great ‘Inheritance Tax Planning’ strategy for our parents to utilise but that’s one I’ll save for another day!

Previously, I have also mentioned the effect that compounded interest can have, in relation to contributing to a pension for a child. I have taken this from an article and have referenced the source.

“?Research shows that stock markets in developed countries across the world have provided average annual returns, with dividend income reinvested, of 7.2%* over the past three decades.

Based on the same growth rate, and without allowing for inflation, putting £5 aside every day from the day a child is born until they reach the age of 10, could result in a pension pot worth £1 million by the time they hit 65.**”

Who wouldn’t want to give their child a million pounds whilst not having to contribute anywhere near that amount?! I know I would. Yes, they would have to wait until they were of retirement age, but in my opinion I’m not sure that there’s a greater gift that could be given.

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Coming back to looking at you, investing for you and your retirement planning...If you are in a fortunate enough position to have a significant capital sum to invest and have been registered in a UK pension scheme, at some point in your life. Then you are eligible to utilise the ‘carry forward’ option. The normal maximum allowed in any one tax year to be contributed to a pension scheme is £40,000 or 100% of your UK Relevant Earnings, if lower. If you haven’t taken advantage of this for the previous three tax years then you are able to add this to your current tax years contribution allowance. If this is you, take advice. Us financial advisers are able to work out the amount of ‘carry forward’ that is available to you and we would always look to start with the oldest year first, to ensure that you don’t lose out in the future years. If you were to invest your full annual allowance of £40,000 this would effectively cost you £32,000 but could be less depending on your individual circumstances! *you are able to contribute to a pension on a monthly basis as well as a lump sum. Lots of my clients look at what they consider to be an affordable monthly amount. If you are self employed then the money paid into a pension, you pay 0% income tax on. Limited Company Directors, the funds contributed to your pension are exempt from corporation tax and for an employed person we would claim back tax relief that has already been paid from earnings. At the end of your financial accounting period, this can often equate to saving you thousands whilst also planning for your future.

We’ve talked a lot here about the tax relief benefits of a pension, which in fact are incredible alone. When you have a pension investment there are choices in terms of different types of funds and portfolios that you are able to invest in. This is where you need to explore your options and take advice. Make sure that the firm you are taking advice from, works well for you. I would say self selection of funds is a lot more complicated but of course, available should that be your preferred choice. Financial advice doesn’t need to cost the earth and there are some advisers out there that are able to offer you an initial, no obligation conversation, depending on the firm that you choose to work along-side and your attitude to investment risk. I would say that a lot of the portfolios out there will target between 5-7% per annum on returns. That’s keeping it conservative. With an investment into stocks and shares, there is risk involved and in return for your risk, over the medium-long term you should see a positive investment performance/reward. This is a much more appropriate investment to have over a 10+ year period. It’s important to understand that there’s always a Brexit or a Covid or a something, so not every year will be positive but the chances are that over the longer term, the positive years should outweigh the negatives...

I hope I’ve still got you hanging on in here, I know pensions aren’t the most exciting discussion point but they’re pretty important, actually financial planning overall is. There are so so many different investment types that allow you to save for your retirement and today I am touching on those that, in my opinion, are probably the two most effective and most common.

The second is investing in property. If you look over the years, property prices are almost guaranteed to create capital growth. There isn’t a period in which we know how long this will definitely take, but if you are financially able to ride out a fall in house prices then over a longer term, you will build up equity! Although a property is a great investment, whether this be residential or rented out. You do need to keep in mind the tax implications of having a rental property. Although on face value a rental property can provide great monthly returns and long term capital growth, you also have the take into account the different taxation rules that will apply. I won’t go into too much detail here as this is more of an individual based scenario and each will be different. But if you are looking to purchase a rental property, I recommend that you take advice from both, a financial adviser and an accountant who is able to give tax advice. During the period that you are renting out the property, the income will need to be declared to the revenue, creating an income tax charge. If you are already earning an alternative income, this can sometimes push you into the next income tax bracket, making the income received, less desirable. You also have to consider over time, that the equity that you gain in the property value on disposal, will be liable to capital gains tax. Not to mention the additional 3% surcharge that would be due on the Stamp Duty Land Tax on purchase.

One of my top tips here, why not have both? If you are lucky enough to have a rental property and don’t need the monthly rent to support your income. Why not divert some of your employed/self-employed earnings into a pension (removing the tax charged on this element of income) and replace it with the rent received. Essentially, you could class this as investing the property income. Although to do so there is a ruling that you have to have alternative earned income to be able to benefit from this. Therefore effectively not creating an additional income tax liability, than that you are already paying.

I think for today I will leave that one there. Retirement planning is very complex and also relative in different ways to different people on a case by case basis. I’m always happy to help to answer any questions, should you have some, either drop me a note in the comments below or pop me a DM.

Thanks for checking in again,

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*Past performance is not indicative of future performance.

**This figure is an example only and is not guaranteed - they are not minimum or maximum amounts. What you will get back depends on how your investment grows and on the tax treatment of the investment. You could get back more or less than this.

Schroders Global Investor Study 2017

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