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How to get retirement right
Before I get into this month’s edition, I would just like to highlight a point that I think most people are currently unaware of…
Are you surprised to see a ‘younger’ Adviser write about retirement? If you are, which demographic will still be advising pensioners in 30 years’ time? Or to put this another way, would you prefer your adviser to retire in the next 5 years, or be one that continues for the next 30 years?
And once the majority of advisers retire over the next 5-10 years, who will be servicing them as well as their clients in the future?
Figure 1.1 Number of UK-regulated Financial Advisers by Age
As time passes, there will likely be a growing demand for a younger Adviser because quite simply an Adviser in their late 20s/early 30s has the longevity. The same 40 hours a week will be spent on providing advice and updating people’s retirement plans. The difference is that the younger Adviser is more likely to see the plans through.
So continuation with the same Adviser during retirement – rather than switching between multiple Advisers – could increasingly be sought after. Just thought I should highlight this for you ahead of time.
Currently a fifth of my clients are in retirement and, going off what I mention above, this proportion could well increase. So here are some retirement tips.
Tax Planning
With national debt still at record levels, which has been the story for some years now, it has become increasingly difficult for households to take home an income whilst paying little to no tax. This extends to income from pensions because it is taxable.
You may have noticed that the full entitlement of the State Pension (£11,502.40) now takes up most of the 0% income tax allowance, called the Personal Allowance (£12,570). This tight margin in recent years has meant that taxable income from workplace and personal pensions has had more exposure to income tax (20%, 40% and 45%).
Therefore we have increasingly seen more demand, across the board, for advice on how to tax-efficiently provide an income during retirement. Some queries include, but are not limited to, how to tax-efficiently take pension benefits (since there are multiple ways), whether to instead look at providing an income via a Stocks & Shares ISA portfolio (ISAs gains are free of income tax, capital gains tax and dividend tax), and to determine if continuing a Buy-to-Let portfolio is a good idea now that rent costs can no longer be deducted from rental income to produce a profit (this change to tax legislation was introduced in 2020).
This squeeze on household income, because of higher amounts being taxed by HMRC, also emphasises the importance of reclaiming income tax where you can by annually reviewing and optimising your available pension allowance. You get an immediate 25% uplift on pension contributions and you can claim for any higher rate or additional rate income tax via self-assessment.
Investment Growth
The difference in wealth at retirement (across ISAs, pensions or other vehicles) between say a 4% annualised return and a 7% annualised return is worth paying attention to. Take a look at the example below. In both cases the induvial is 27 and starts with £50,000 in their pension.
These figures are for illustrative purposes only and they are not guaranteed - they are not minimum and maximum amounts. What you get back depends on how your investment grows and the tax treatment of the investment. You could get back more or less than this.
Figure 1.2 Difference in Pension Values
It used to be that the default option at retirement would be to purchase a guaranteed income (an annuity) that would last throughout retirement. Due to people living longer, however, it might be better for your future self to remain invested and take your pension benefits via monthly drawdown. The benefit here is that the provision for your future self has the chance to keep growing. Meanwhile you can still take pension benefits to meet your short-term needs.
Considering your asset mix is therefore important leading up to, and during, retirement.
‘Income drawdown' will reduce the size of your pension fund and the investment growth may not be sufficient to maintain the level of income you wish to draw. If you withdraw money at a rate greater than the growth achieved by your investments, your remaining fund will reduce in value. The level of income you take will need to be reviewed if the fund becomes too small - this is more likely the higher the level of income you take.
The income you receive may be lower than the amount you could receive from an annuity, depending on the performance of your investments. As annuity rates can change substantially and rapidly, there is no guarantee that when you do purchase an annuity the rates will be favourable. This could mean that your pension thereafter may be less than you hoped for.
Leaving a Legacy
Linking back to tax planning, in the early years of retirement it might be prudent to take income from tax-efficient vehicles such as Stocks & Shares ISAs. Not only does this mean less income tax will be paid, it reduces the value of the estate whilst it better preserves the total investment value across all investment vehicles.
To illustrate what I mean, below is an example that shows a couple in retirement using their pensions first, versus accessing a pension later. The pension income is in orange and income from ISAs is in blue.
Figure 1.3 Delaying Pension Income by using ISAs first
This is a great way to minimise income tax and to reduce the size of one’s estate for inheritance tax purposes. By utilising ISAs first and delaying income from a pension, there will be less taxable income from a pension and there will be, on balance, more capital available for beneficiaries to inherit. The reason why that is, is because pensions sit outside of the estate and are not included in the inheritance tax calculation.
Conclusion
Tax and pension legislation frequently changes. Against a headwind of an increasingly older population, it’s going to be important to get your retirement right. This is where an Adviser can help, through initial and ongoing advice, so that you have the income you need to meet your retirement goals.
The value of an investment with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief is generally dependent on individual circumstances.
