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It Pays to Have a Plan

by Rob Maddision, RMJ Wealth Management

Whether retirement is many years away or just around the corner, unless we start planning for it there is a great danger that we could outlive our savings. The golden rule is to determine exactly how much you are going to need in retirement and to take action to meet your lifestyle choices.

The stark reality is that most us need to save more, with people living to a greater age retirement can now last longer than the time we spend working. We all must accumulate more when we are earning to meet the extra costs of living longer and the decisions we make today will dictate the standard of living we will enjoy in retirement. But beware the cost of delay, the great danger is not saving enough and not being able to fund a standard of living you have become used to while working.

Projecting potential future value & income at retirement from a pension today is possible and something we do on a regular basis; it can be a surprise to see an illustration of what retirement could look like years from now.

How much will you need in retirement?

Your life in retirement is likely to be very different from your working one, both personally and financially. You will probably have lower outgoings, children will most likely have left home and most of your long-term debts like a mortgage should have been cleared.

You do need to take into account, however, that you might want to spend more on leisure activities like holidays & travelling. You may choose semi-retirement, maintaining some level of employment while you are still happy to work or run your business. It is therefore clear that making a calculation for your retirement fund is entirely personal.

 Investing for your retirement and in your retirement

 Pensions have a unique advantage when it comes to investing for your retirement, thanks to the availability of tax relief and the ability to obtain it by contributing up to 100% of your earnings or £40,000, whichever is lower. While calculations can get complicated and scenarios are dictated by personal circumstances, this means personal contributions are payable net of basic rate tax of 20% and relievable up to the additional higher rate of 45% (2017/18). So, if a member pays a contribution of £32,000 net of basic rate tax, the scheme will invest £40,000.

Assuming that 40% higher rate relief is available on the whole contribution, the real cost of the contribution will be reduced by a further 20%, or £8,000 in the example, to £24,000. That means £40,000 invested for a contribution of just £24,000.

This is only one part of the story, the other is investing correctly to meet your lifestyle objectives for retirement, your risk level or if you are already retired investing to maintain your standard of living. What is clear is we are living longer and saving less, and we need to do more.

Choosing When to Retire

The big benefit of the current rules is that pension investors have a choice in terms of how and when they retire, and investors can start taking their pension benefits at any time after 55. However, the most important factors in determining how and when you retire is how much you have invested, for how long and the value of those investments.

If you are short of meeting your retirement fund target, the longer you leave it before topping up, the more expensive it will be to catch up by your intended retirement age. So, by starting to contribute earlier the more your costs are reduced and the better lifestyle you will have in retirement, it pays to have a plan.

If you have a pension issue you would like to discuss then please email Rob at rob.maddison-joss@sjpp.co.uk

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