Ellis Bates Financial Advisers
Regional Manager and Financial Planner, Dax Bayley, shares how he enhanced someone’s life by using cashflow modelling to help them to retire earlier than they had planned.
Funding the lifestyle you want – get your retirement plans in motionOne of the most common concerns among those approaching retirement is whether they will have enough money to last them. A new study[1] shows that only 25% of retirees feel very confident they’ve saved enough for retirement.
As food prices continue to soar and petrol costs reach an all-time high in the UK, the rising cost of living is without doubt having an impact on many people’s financial plans, both short and long term.
If you’re approaching retirement or have already started taking money from your pension or other retirement savings, you wouldn’t be alone in feeling a little anxious about the effect the cost-of-living crisis might have on your lifestyle in retirement.
While it’s impossible to predict the future with complete certainty, there are a few things you can do to feel more confident about spending your money in retirement.
Your main source of retirement income may well be your pension plan. But when it comes to planning your finances in retirement, it’s important to think beyond this. Consider other potential sources such as Individual Savings Accounts (ISAs) and other investments, as well as any rental income you receive from rental properties you let.
And don’t forget the State Pension, which is currently £185.15 a week (£9,628 a year) for a single person with a full entitlement. Although the State Pension’s annual increase is currently below inflation, every little helps and the total of all your savings and income might add up to more than you think.
Paying too much tax in retirement is a common pitfall for some retirees, and one that could be potentially avoided with having the right plans in place.
If you’re already taking or plan to take income from multiple sources, you need to consider how that will be taxed. When and how you take your money can make a big difference to how much tax you pay and how long it will last. Taking money little and often could make all the difference when it comes to reducing your tax bill.
When it comes to your pension savings, you can typically take 25% tax-free from age 55 (age 57 in 2028), either in one go or spread out over a longer period. After this, any money you take from your pension savings, as well as your State Pension, is taxable just like any other income.
That means you’ll need to pay income tax on anything over your tax-free cash limit and any annual personal Income Tax allowance you get.
It’s likely that the more money you take, the more tax you’ll have to pay, although how much will depend on which tax band your income falls into. So if you take all of your pension savings at once, or in big lump sums, you could be paying more tax than you need to. But by taking your pension savings over a number of years and taking just enough to stay in the lowest tax band you can, you could keep more of your money overall.
Another way to avoid an unnecessary tax bill is to make the most of your ISA savings. You don’t pay tax on any investment growth or interest you earn, or on the proceeds you take from an ISA. So it’s a very tax-efficient way to save.
You could consider using any ISA savings you have first and delay accessing your pension savings, giving them more time to stay invested and potentially grow in value. Remember though, the value of all investments can go down as well as up, and you may get back less than you paid in.
Or, if you’ve already started taking an income from your pension, you could use your ISA savings to supplement that income. This could allow you to take smaller payments from your pension and avoid overpaying Income Tax on them.
Getting to grips with tax implications can be a bit overwhelming as there’s a lot to consider. Tax rules and legislation can change, and personal circumstances and where you live in the UK also have an impact on your tax treatment. On top of that, tax varies for other sources of income like property, state benefits, or even your salary if you’re planning on working in some capacity for a little longer.
Where your money is invested could have the biggest impact on how long it will last in retirement. It’s important to regularly review your investments to make sure they remain on track and remain aligned with your plans and attitude to investment risk.
For example, your pension savings may be invested in fairly high-risk funds that have the potential to grow significantly in value, but also are more likely to be impacted, particularly during periods of market volatility. Moving to lower-risk investments means that you’re less likely to see big ups and downs in the value of your pension savings.
However, if you’re relying on your pension savings to provide you with a comfortable income for the rest of your life, you also need to make sure that your investments will provide enough growth potential. This is particularly important in the current climate where your money faces the double challenge of rising inflation and potentially having to last for many years.
If you have specific questions about funding your retirement lifestyle, feeling anxious about spending money in retirement or asking yourself “how much do I need to retire?” then speak to us to discuss your retirement options.
Source data: [1] Class of 2022 UK retirement report consumer research of 2,000 UK adults for abrdn who were either planning to retire in the next 12 months, or who had retired in the 12 months prior. Research was conducted by Censuswide in late November / early December 2021.
A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless plan has a protected pension age).
The value of your investments (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. Tax treatment varies according to individual circumstances and is subject to change.
52% of 1,212 UK adults surveyed are concerned they have not saved enough money to sustain their current lifestyle in retirement
34% of full time works say the state of their retirement finances is a cause of “significant stress”
9% said they doubt they will be able to fully retire
37% say they have a clear retirement savings strategy
24% had reduced their contributions since the start of the Covid pandemic
On average, respondents said they saved £298 into their pension each month
Step One: think ahead to the type of retirement you wantThe first step is always to have an idea of what you want to do when you eventually stop work. It is helpful to have a good idea of the lifestyle you want, how much it will cost and how you are going to pay for it. You may want to travel, spend more time with family and friends, pursue hobbies and interests or move house. However you see your retirement, itis important to think ahead, plan ahead and cost up how much this may cost so you put a savings/investing plan in place.
You will need to make sure that you have enough saved up to cover your basic costs including living expenses and any debts or financial obligations you may have. You will need to look at your current savings levels, investments, pensions etc and map them all out to see what you already have/expect to have and then to put additional savings/pension contributions plans in place. Once this is done you will have a better idea of how much you will need to retire. At Ellis Bates we use sophisticated cashflow to map out your income and expenditure and map these against your retirement goals to bring your retirement journey to life. Hop over to https://www.ellisbates.com/retirement-calculator/to add in some overview numbers to get an idea of how much you will need to retire.
Retirement planning is complex but the more enthusiastic you are about retiring, the more likely you are to develop a robust retirement plan and retire at the age you want to and with the lifestyle you want.
The cost of living will go up as we are seeing currently, so you’ll need to make sure that your savings and investments including your pensions not only keep can keep pace with inflation but keep ahead if possible so that your buying power is not eroded.
External advice compensates for any emotional biases you may have about making big financial decisions. A DIY approach to managing large pension funds at retirement is fraught with risk. People can easily buy the wrong products, incur unnecessary tax bills or simply exhaust their retirement funds too quickly, whereas an adviser will provide an impartial, cool-headed approach to your finances and offer solutions you will not have considered. Obtaining expert professional financial advice will ensure you are on track to meeting your goals. The sooner you start planning, the more likely you are to achieve a comfortable retirement, at an age you choose. We can help you calculate how much you need to retire, simply book a free consultation.
Planning your future has arguably never been more important.
Please contact us if you require any further information or guidance on your retirement.
Are you scared of running out of money in retirement?
It has been well recognised that many are simply not saving enough into their pension pots for retirement. To avoid unwanted stress if you are planning to retire, you need to be absolutely sure your money is going to go the distance. Concerns you may have are:
Firstly, it is never too early to start saving for your future, and the earlier you start the better.
Pensions have a tremendous compound effect so the basic principle is the more you put in, the more you get out. The way you accumulate your retirement money and how you use it during your retirement will have a big impact on how long it will last – and also the amount of tax you pay.
Here are just some of the steps you can take to improve your pension pot size:
The Government encourages you to save for your retirement by giving you tax relief on pension contributions. This means some of the money that you would have paid in tax on your earnings goes into your pension pot rather than to the government. Tax relief has the effect of reducing your tax bill and/or increasing your pension fund. For a more detailed look at pension tax relief visit https://www.gov.uk/tax-on-your-private-pension/pension-tax-relief
The State Pension is a weekly payment from the Government that you can receive once you reach State Pension age (66). The current state pension amount is £179.60 a week (2021-22), but you may get more or less than this.
To qualify for the State Pension you need a minimum of 10 years of National Insurance contributions. To find out more on how much State Pension you could receive and when visit https://www.gov.uk/check-state-pension
When it comes to investing during retirement, it is important not to view your portfolio with an element of finality. Your investment risk profile and strategy will almost certainly need to adjust to look at ways of making your money work as hard as possible, but with a view to generating earnings to boost your retirement income.
This is a time to look at how balanced your investments are and whether you are exposed to more risk than you are comfortable with. It is a time to review all your investments and decide how much you can afford to withdraw each year and whether this balances with your needs.
It is always important to think ahead to retirement and not rush into making life-changing financial decisions. We can help you determine which retirement income approaches may be best for you based on your personal needs and goals. If you are scared of running out of money in retirement and would like to talk to us about your retirement requirements, then please get in touch.
What you need to consider at every life stage during your retirement planning journey.
When you’re starting out working in your 20s, you may not be thinking about retirement in 40 years’ time. The same goes for your 30s, 40s and even 50s. There is always something on the horizon you could be saving for besides your retirement.
No matter how old you are, it’s always a good time to review your pension savings and update your retirement plan. Understanding your retirement goals during each decade is key to making sure you are able to enjoy and live the lifestyle you want, and which you’ve worked hard for, when you eventually decide to stop working.
Though you’re decades away from retirement, your 20s are an important time for pension planning. That’s because the investments you make in these early years will benefit from the most growth potential.
When you start work, if applicable to your situation, you’ll be automatically enrolled into your employer’s workplace pension scheme and they will start to make contributions on your behalf.
You should definitely not opt out of this – even if you feel you could do with the money now.
By your 30s, you may have additional financial responsibilities, such as children and a mortgage. These can make it difficult to dedicate as much money and attention to your pension as you’d like.
One way to stay on track is to review your pension contributions at least once a year and make sure you’re increasing them as your income grows. Another consideration is to check your investment strategy. With decades remaining before you’ll access your pension, you might choose to take a higher-risk approach now, and then gradually move into lower-risk investments as retirement grows closer.
If your salary follows a typical trajectory, it is likely to start peaking when you’re in your 40s, making this decade a crucial time for pension accumulation. You should, by now, also have a good understanding of the income required to support your desired lifestyle, which will help you plan your retirement income. Based on this, you’ll know if you need to adjust your pension contributions to save enough.
At this life stage, you might have changed employers several times, so it might be sensible to check that you have all of the details for any old pensions and, if not, look to track them down.
If your pension contributions have fallen behind in any of the previous decades, it’s crucial to catch up now. As well as your salary sacrifice contributions, you might consider adding lump sums to your pension to help you reach your retirement goal.
If you plan to do this, make sure that you’ve checked what your annual allowance for this tax year is, and how much unused annual allowance you have from the last three years. This will determine how much extra you can contribute and receive tax relief on. For the tax year 2021/22 the annual allowance is £40,000. This includes both contributions paid by you and contributions paid by your employer.
Alternatively, if you’ve stayed on track with all your pension contributions and your savings are at a very healthy level, you might need to take steps to manage your Lifetime Allowance. Currently, the maximum you can accrue within your pensions in your lifetime is £1,073,100, so if you’re anywhere near that number you should seek professional financial advice.
In the decade before retirement, some people may choose to take a lower-risk investment strategy with their pension savings than in previous years. While this may limit the potential growth of your investments, it can also reduce fluctuations in value, which can help you to plan your retirement income with more confidence.
You’ll also need to weigh up your options for accessing your pension. You might want to take a lump sum or several lump sums, or you might want to take a regular income. There are advantages and disadvantages to each approach, and decisions you make now will affect your income throughout your retirement.
With so much going on in your life – from family and work to pursuing your passions – retirement planning may not be your priority. But it’s your pension and overall financial situation that will allow you to keep up your current lifestyle and enjoy your golden years. Speak to us today and make sure your plans are on track for the retirement you want.
Creating a comfortable, secure retirement takes care and forethought. If you’re 10 to 15 years from retirement, you’re probably starting to think more about how you’ll spend your life after work. You might be contemplating travelling more, dedicating more time to your passions or enjoying more free time with your family.
However, are you concerned that the idea of a financially comfortable retirement is increasingly unattainable? You might have some concerns about your pension savings and whether they’ll provide the income you need. If you haven’t already done so, now is the ideal time to take stock of your current situation and make any necessary alterations to ensure you’re on track. Here are five tips to help you get started.
Everyone has a different idea of the ideal retirement and so will have different spending needs. Looking at your current outgoings is a good place to start. Calculate how much you spend each month on paying down debts, paying bills, essential spending and non-essential spending.
Then, consider what might increase or decrease over your retirement. For example, you may be reaching the end of your mortgage, which will mean your debt payments go down. But you might plan to take up a new hobby, which will mean your non-essential spending goes up.
Remember to factor in any large lump sums you plan to spend, such as helping your children with property deposits or taking a dream holiday.
You might have accumulated several different workplace pensions with different employers over your lifetime, so you’ll need to total the savings you have in all of them. Start by contacting previous employers to find out the name of the pension provider. If you don’t have the details of each pension, we can help you trace them.
Remember, it’s not only pension savings that can dictate your retirement spending, but also other sources of income, such as buy-to-let properties or investment portfolios, so be sure to include these too.
If your current pension savings won’t cover your expected retirement spending, you can adjust your current financial arrangements to help you reach your goal.
You may also want to make lump sum payments into your pension. If a lump sum would take you over the £40,000 pension annual allowance, you can use unused annual allowance from up to three previous years.
Your pension annual allowance is the most you can potentially save in your pension pots in a tax year (6 April to 5 April) before you have to pay tax, unless there is carry forward available.
Your pension savings might currently be invested based on a higher-risk strategy to maximise the potential returns on your investments. But as you approach retirement, you may want to choose a lower-risk strategy with an emphasis on preserving the wealth that you have rather than growing it.
Lower-risk strategies tend to result in fewer losses and slower, but more predictable, growth. That can be preferable when you’re trying to ensure your savings last a lifetime. We can help you establish the right strategy for your risk appetite and goals.
Some people want to stop working as soon as possible, but that’s not the right choice for everyone. They may dream of an early retirement in their mid-50s, but once they leave behind their workplace at such a young age they might not find retirement fulfilling. Also, the amount in their savings or portfolio may not reflect what they’ll need to enjoy the coming years and lifestyle they want.
These days, there is a trend for people increasingly deciding to slowly reduce the hours they work over a few years or to take on a part-time job in the early years of their retirement to keep busy and continue to contribute to a pension. Others may use a lump sum at the start of their retirement to establish a small business. There are many different retirement journeys that might suit your lifestyle and financial goals.
Making all these decisions alone can be stressful, and no one should enter retirement feeling uncertain that their savings are sufficient to last a lifetime. Seeking professional financial advice can give you peace of mind so that you can relax and enjoy this next life stage. Speak to us for more information or to discuss your requirements in creating a secure retirement.