This article is written by

Andrew Sutherland

Andrew Sutherland of True Bearing Chartered Financial Planners believes in taking a comprehensive approach to retirement planning.

Find out more about Andrew

Since the pandemic, I’ve noticed more people are coming to me looking for ways to help them retire early, even if they have no immediate plans to stop working. More of my clients are recognising the value of having a retirement plan in place that allows them to keep their options open. My goal is to get them to the point where they can retire at a time they choose, and have the money to be able to enjoy themselves.

Investing as much as you can afford to into your pension is a plan that will usually pay off over the long-term

A retirement plan is not just a pension

Most people, when they think about planning for retirement, immediately think about their pension. That’s no surprise – pensions are generally the most tax-efficient way to fund retirement, as they benefit from employer contributions as well as tax relief on the amount you invest. Investing as much as you can afford to into your pension is a plan that will usually pay off over the long-term, plus, paying into a pension over decades means you can invest in higher risk assets in the early years to potentially benefit from higher returns, if you’re comfortable doing so.

However, as clients get closer to their retirement, I often remind them that retirement planning advice covers more than just their pension, it should include all their other assets as well, such as savings, investments, and property. Taken together, these assets should all be considered as your ‘retirement pot’. Approaching retirement planning this way, makes it much easier to build a financial plan capable of helping you to reach your retirement goals.

Financial planning for retirement

One of the first questions I ask clients is what they want from their retirement, and then, how do they plan to pay for it. Some clients are interested in securing a guaranteed income for the rest of their life, while others want access to a lump sum, and more flexibility in spending their retirement pot. Most people are usually interested in a combination of the two, and to make sure that their income doesn’t suffer too much after they’ve stopped working.

There are a lot of tax considerations to think about when planning for retirement, including making sure you’re investing in the most tax-efficient manner

Retirement planning advice

There are a lot of tax considerations to think about when planning for retirement, including making sure you’re investing in the most tax-efficient manner (ideally by making the most of tax relief in a workplace pension, as well as other savings and investments). There are also tax implications that come with withdrawing money from your pension, either as income or a lump sum. After you’ve turned 55, you can generally take up to 25% of your pension savings in the form of tax-free income or lump sum(s). Any further withdrawals over your annual income tax allowance (either via drawdown or an annuity) will be taxed at your nominal rate. Taxation can be a bit of a minefield, so again, seeking advice is key.

Clients often feel concerned they haven’t accumulated enough in their pensions to last them through retirement. Which is why it’s so important to crunch the numbers and find out how much you have accumulated for retirement and how much you think you’ll need in retirement. Once that’s been established, we can then work out a financial plan that can help to cover any potential shortfall between the two. We use cash flow modelling to assess whether your pension and other assets are likely to be able to meet your retirement income objectives for the rest of your life..

Once that target has been established, it’s much easier to factor in other assets alongside the pension. For example, people might have cash in the bank, investments in Individual Savings Accounts (ISAs), or they may have rental properties providing them with another source of income. Taking all of these other assets into account makes it much easier to create a realistic plan. In addition, getting a true sense of your net worth going into retirement gives clients the opportunity to take any necessary action sooner rather than later.

What about multiple pensions?

I often talk to clients who have accumulated several pensions from a handful of previous employers. In such cases, my job involves determining how much these different pensions are worth and where they are invested. Once that’s been established, together we can work out whether you would be better off transferring those assets into a new pension more suited to your retirement plans and need for income or capital.

Poor returns and high pension charges can sometimes act as a ‘double whammy’ on a pension, eating into returns and leaving you with a much smaller pension pot than you could have built up elsewhere. However, older pension plans often carry exit penalties, and in some instances, transferring means losing valuable benefits – such as a guaranteed annuity rate – that you may not be able to get elsewhere. That’s why it’s really important to take expert advice from someone who knows the pitfalls associated with older pension products.

Talking of pitfalls, I regularly have conversations with clients approaching retirement who are keen to take a tax-free lump sum from their pension, specifically to repay their mortgage or other debts. People often feel that they should start retirement ‘debt-free’ wherever possible. However, I often tell my clients that this may not be the best approach. Again, it’s important to consider your entire retirement pot before making any big decisions such as withdrawing a lump sum of your pension – because once that money has gone, you can’t get it back. The good news is that it may be possible to use other assets in your retirement pot that achieve a better result without giving up some of the advantages that a tax-free lump sum offers you.

When it comes to retirement planning, a pension is likely to be just one part of the puzzle

Retirement planning is a journey

When it comes to retirement planning, the pension (or pensions) you own are likely to be just one part of the puzzle. There are other elements that should be considered as part of your plan, including any savings and investments you hold, how you plan to pass on your wealth or use it to look after family members, as well as making sure the decisions you make on how you spend your retirement pot are as tax efficient as possible.

Retirement planning is a journey. And, just like with any journey, there’s more than one way to get there. It’s important to stay positive, build a plan that you’re happy about and that you can stick to, and make sure your plan is regularly reviewed to ensure it stays on track.

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