From retiring early to ‘full financial security’ by 70: How much is enough for retirement? | Personal Finance | Finance
Many Britons are not saving enough for retirement, with a new report from B&CE showing that almost two-thirds of people are not saving up enough for a retirement income. More than two-thirds of Generation X workers, born between 1965 and 1980, aren’t saving enough, as well as more than three-quarters of Millennials, born between 1981 and 1996.
Express.co.uk has asked financial experts to give some tips for people in three different scenarios, about how they should arrange their finances in the short term and for their retirement years.
James Beck, a certified financial planner from Nottingham, spoke about how a single parent in their 40s and a couple in their 60s may want to plan ahead.
Scenario One: A single mum
She is in her 40s, earning £60,000 with two pre-teenage children. She wants to set up a university fund for her children, with few savings but a small disposable income.
Short-term plan
Stocks and shares ISAs – Mr Beck explained:“If maintaining control is important to her, she could invest her excess income into a stocks and shares ISA. The maximum she could contribute is £20,000 each year.
“All the investment growth is tax-free and any withdrawals she makes in the future would also be tax-free.
“When the time comes for her children to go to university, she’ll be able to decide whether she wants to use the university fund built up, or alternatively her children could take a student loan out.
“This gives her the flexibility to save for her children’s future but not commit to giving her savings away immediately.
“Assuming a six percent investment growth rate, if she saved £250 per month per child after eight years, she could have around £30,000 for each child.
“She could consider Junior ISAs for her children; however, they would have access to this money at age 18.
“She’d need to be comfortable with this arrangement which would be slightly less flexible for her.”
Life cover – “To protect her children, she should have sufficient life cover in place to support her children if she unexpectedly passed away and income protection if she’s off work with long-term sickness”, said Mr Beck.
“The cover should include enough for the university fund, so should anything happen, this goal can still be reached.
“She may already have a death-in-service scheme and group income protection in place with her employer so it’s worth checking this with the HR department before putting any further cover in place.”
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Long-term plan
Pensions contributions – Mr Beck explained: “To save for her own future if not already, she should begin to make pension contributions.
“Due to her income, she is currently a higher rate taxpayer and will also pay the high-income child benefit tax charge which means she receives no child benefit support currently. Through pension contributions, she can claim income tax relief of 40 percent and remove the entire high-income child benefit tax charge.
“She may even be able to reduce the amount of National Insurance contributions she pays if her employer’s pension scheme allows contributions through salary sacrifice.
“This is an incredibly tax-efficient way for her to save for her own future.
“This would also reduce her adjusted income for calculating high-income child benefit tax charge to £50,000.
“This would mean she would no longer have to pay this tax charge allowing her to receive an additional £1,885 child benefit payments each year. Essentially to receive £10,000 into her pension it’s cost her £3,817.”
Scenario Two: A married couple in their early 60s
The husband works full-time, the wife works part-time, with a combined annual income of £95,000. They have a small nest egg and they want to retire by 70 with full financial security, with some help for their two grandchildren.
Short-term plan
Maximise pension contributions – “The husband is likely to be a higher rate taxpayer he can claim 40 percent tax relief making this a very tax efficient way to save for retirement,” James explained.
“It’s also sensible for the wife to maximise contributions as she’ll gain tax relief at 20 percent.
“When they start to draw on their pensions by both building up a pot, they’ll both be able to use their available personal allowance to withdraw funds tax efficiently.
“Assuming they have a full state pension they will receive £19,200 state pension so to sustain an income of half their current income (a try of £47,500 per annum) they have a £28,300 shortfall.
“Broadly they would require a pension pot of approximately £710,000 between them to provide this level of income increasing with inflation each year.”
Junior ISAs for grandchildren – Mr Beck said: “They could invest into Junior ISAs for their grandchildren, ensuring their children are involved in the process so they are set up correctly.
“They can make small regular investments which would compound over time and could be accessed at age 18 by their grandchildren.
“Assuming a six percent growth rate, contributions of £100 per month per grandchild in 15 years’ time could be worth over £24,500.
“This would be a great stepping stone for them to help them get into the property ladder.
“The gifts would fall within their annual gifting exemption (£3,000 each), so they would also be immediately outside their estate for inheritance tax purposes.”
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Long-term plan
Cash flow – Mr Beck said: “Cash flow planning can be used by a financial planner to help them understand if they can afford to retire before 70 and how much they’d need to invest now to do this.
“When looking to draw benefits at retirement a full review of whether an annuity (a guaranteed income for life), pension drawdown (keeping their pension invested and making
withdrawals) or a combination of both should be considered.
“As part of this process, it’s essential the husband and wife’s attitude to risk is re-assessed to ensure the right solution is selected and their goal of having full financial security can be met.”
Scenario Three: A couple in their 50s
Nicola Watts, director at Jane Smith Financial Planning, discussed how a couple in their 50s could plan ahead for their finances.
They are both earning an average salary, have a total annual income of £80,000. They want to retire in their early to mid-60s.
They have one grown-up child who is working, and they are mortgage free, with some savings and a healthy disposable income.
Short-term plan
Ms Watts said: “It’s important this couple works out where they are and what they want to achieve.
“By working out what they already have in place and having clear goals, they can create a cashflow (something like Truth About Money) that helps them understand what disposable income they have, where their shortfalls are and what actions they need to take or what savings they need to make.
“They can do some of the work themselves or they might like to employ the services of a certified financial planner who can help guide them through this process to make sure they are not missing important details or valuable opportunities.”
Wills and lasting power of attorney – “Of course, we all want to plan for a long and fulfilling retirement, but it’s also important to ensure that if things don’t quite go to plan, this couple are prepared,” explained Ms Watts.
“Having a will in place can help to ensure that legacies are left in line with their wishes, rather than following the rules of intestacy.
“There are also potential opportunities for inheritance tax planning. In the event of incapacity, it’s important that someone of their choice is able to make decisions, without delay, regarding their finances, care and treatment.
“So, we’d recommend they have both Property & Financial Affairs Lasting Power of Attorney and Health and Welfare Lasting Power of Attorney drafted and then immediately register them with the Office of The Public Guardian.”
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Long-term plan
Pensions – Regular pension contributions would be a good option. Both being employed, they should join their employer’s workplace pension to benefit from contributions their employer will also make.
Ms Watts added: “However, they might also wish to consider additional contributions. Contribution levels are capped depending on earnings, but they might be able to carry forward unutilised allowances from previous years.
“They will benefit from income tax relief, with each £80 they contribute benefitting from an additional £20 tax relief from HMRC.
“If either of them is a higher rate taxpayer, they should be able to claim the difference between basic and higher rate tax via self-assessment.
“Additionally, funds invested to pensions are, in most cases, not liable to inheritance tax. However, on death post-age 75, any remaining fund may be liable to a different tax regime that applies to pension death benefits.
“Having reached the minimum pension age (currently age 55), they will be able to access their pension. 25 percent of the fund can be paid as tax-free cash, whilst any further withdrawals will be liable to income tax.
“Any withdrawals should be carefully considered in terms of income tax liabilities but could also impact their options for further pension contributions in the future, as the Money Purchase Annual Allowance might apply.
“They will need to ensure that funds are invested in line with their attitude to risk and objectives.”
Stocks and Shares ISAs – Ms Watts said: “Maintaining an emergency fund and funds for
planned expenditure is important. However, cash returns are highly unlikely to beat inflation.
“Regular savings to stocks and shares ISAs should be considered. Although investing at higher risk, investing for the long term, they should expect to see above inflation returns.
“This is an important consideration when ensuring that funds maintain their buying power long-term.
“They can each save up to £20,000 per tax year to ISAs, with funds then growing in a tax-efficient environment with no liability to either income tax or capital gains tax.
“However, remember they are still liable to inheritance tax (unless investing to assets that qualify for Business Relief).
“ISAs could provide more flexibility than pensions, can be accessed at any time (subject
to provider terms and conditions) and could provide a valuable source of tax-free income in retirement.
“As with their pensions, they should ensure that they are invested in line with their attitude to risk and objectives.”
