When are you planning to retire? There’s a fair chance you want to retire in your late 50s or maybe 60. Great! Have you thought about how you’re going to fund your retirement? Even if you’ve got a final salary type pension, you’ll need to think about it, albeit longer term funding is arguably a little easier to comprehend. There is a common gap between your sought retirement age and state pension age, which is rising to 67 from 2028. The state pension provides an income for the rest of your life and for some, is the main income in retirement, for others, forms a foundation for their future.
You’re looking at a combined new state pension of around £18,000 for a couple, which is nice, but won’t allow many holidays or new cars and in any case, you’ve got a quite a wait between ceasing work and state pension age, if for example, you want to retire at 60. This is where some planning ahead is important. Thinking about a strategy aged 59, is not giving you much opportunity to get your finances in order.
My general mantra is to try and take advantage of allowances and tax breaks, when you can and to a level that is affordable. Ideally, you would be getting nearer to retirement with a mix of ISAs, pensions, general investment accounts and cash. There’s a fair chance that you’ve got a property too, but that’s your home, so I’m ignoring that for now.
Too much in any one ‘pot’ is not advantageous. Say you’ve got a pension worth £750,000. That’s fantastic, but bar the 25% tax free allowance, you’ll be paying income tax on withdrawals, which is exacerbated if one partner has the majority of the pension wealth.
What to think about – the basics
- Use your ISA allowances – up to £20,000 per adult, per tax year
- Pensions – make contributions as you can afford and take advantage of employer contributions. Save income tax & grow your pot, whilst you’re earning
- General investments – this is a useful additional pot to consider, but I would advocate items ISAs and pensions should probably take priority
- Cash! We all need cash and irrespective of your investment levels, you need to retain cash.
Order of spending your money
It might seem counterintuitive, but there are benefits for leaving your pensions alone. They are useful for inheritance tax planning and investments within pensions grow free from capital gains tax. If you have a general investment account, use that first. ISAs next – in fact, you could take any income generated by your ISAs to help supplement your income. Pensions last. Cash fills the gaps!
However, if you stop earning a salary and don’t have any other income, then you have a personal allowance (£12,570 per tax year) that you don’t pay tax on, that you are essentially letting go to waste. In that case, why not consider taking chunks from your pension – you don’t necessarily have to commit to taking an income from your pension, keep it flexible!
Many, many questions and there is no set formula that will work for everyone, but there are some golden rules
- Make use of those allowances (notably pensions & ISAs)
- Don’t leave too much in cash – over the long term, it WILL lose value
- If you’re a couple, try and grow your wealth together
- Think ahead and don’t panic
Thanks for reading and….