Our CEO Charlotte Ransom answers a weekly question for readers of the i paper – helping them to better understand their investments and how to effectively plan their finances to achieve their long-term goals. Many of these questions are also highly relevant for Netwealth readers.
Question: With the ongoing cost of living crisis and stubborn inflation, I am becoming increasingly worried that I won’t have enough money for a comfortable retirement. I am in my mid-fifties, earn £70,000 a year and have pension pots worth £300,000. I am unmarried and have worked out that in retirement I would need £25,000 a year to be comfortable and go on the trips abroad that I would like. What are some of the actions I should be taking now to help me reach this goal?
Answer: It can be difficult to know how much is enough for a comfortable retirement. We all have individual circumstances and needs and the more you can do to be better prepared – even if you have built up a pension and have been generally sensible with money to date – the better.
There are a few things to consider. Firstly, when do you intend to retire – in other words, for how much longer do you expect to have a regular income? This can make a significant difference to your longer-term plans since it puts off the point when you will be drawing from your pensions and savings and also gives you the opportunity to continue saving additional funds for your retirement pot. Secondly, you want to calculate how much you think you will need to live on which you have established as £25,000 a year.
Also important is to recognise how long your retirement may last. Living longer can lead to fruitful and exciting experiences, but comes with extra costs, so you need to allow for spending that could last longer than you might expect. It’s potentially also helpful to try to simplify your position and, if you still have a mortgage, it may make sense to prioritise paying this off unless you have locked in a very low mortgage rate with a long maturity. You will want to avoid being subject to high rates at the point in your life when you may have less financial flexibility than when you were employed.
From a tax efficiency standpoint, it’s sensible to keep topping up your pension and as you will pay 40% tax on £19,730 of your salary you could make net of tax contributions of £11,838 per year to receive tax relief on all of this higher rate tax. Then when you are drawing down you will receive 25% tax free and should be able to keep your overall tax rate below 20% with the use of your personal income allowance. You might also contribute to an ISA if you have additional means to do so.
For both pensions and ISAs, keep an eye on how much you are paying in fees – we routinely find investors are paying at least 1% more in annual fees than they need to and this can make a significant difference to your future outcome. As a rule of thumb, paying an additional 1% in annual fees results in 14% over 10 years, so for every £100,000 that can mean losing £14,000 in unnecessary fees which is huge.
Another familiar topic, if you have children, is the possibility that that you would like to support them financially and take advantage of Inheritance Tax planning. While this is a common desire among parents, it is critical to understand first whether you have sufficient assets to support your own needs before giving money away.
Generations who have already faced retirement can also teach us a few things. For example, we carried out a survey last year with people who were already in or near retirement. One in four retirees aged 75+ underestimated how long their retirement would last and 43% wished they had accounted for later life care costs. Overall, the findings underscored a common thread of retirees often regretting not having a rigorous plan for their retirement years.
In your case you have amassed a decent pension pot of £300,000 and would like to draw £25,000 a year to fund your lifestyle when you retire.
Since you are in your mid-50s, you could easily have 15 years or longer of working full time, and then you may downshift or pursue a part-time role that inspires you. However, let’s assume you retire at the currently designated UK retirement age for men in 2034 – which is 67.
If you invest your pension pot efficiently (for example, with annual fees of 1% or less in a balanced mix of equities and bonds), and can set aside £986.50 a month of your net income (and add the higher rate tax relief to your pension pot), and if we also consider the full state pension of £203.85 per week, you should be able to meet your income goals in retirement to at least age 92 – assuming an average inflation rate of 2.7% and average investment returns of 4.7% a year.
Inflation is always important to factor in to these calculations. While we all hope we won’t be burdened with the very high rates we have experienced in the last year or so, even the long run average of around 2% inflation for the past decade will have a meaningful impact on the real value of your retirement pot over time, so you want to be able to build that in to your projections.
And remember that you can potentially increase your state pension. The deadline to add extra years to your National Insurance record was originally due on 31 July this year, and was recently extended to 5 April 2025. So if you have any gaps in contribution years since 2006 it is very likely to be worthwhile applying to top up your pension.
To see if you are on track to achieve your goals you can also use an online retirement planner (such as Netwealth’s) which allows you to get a useful estimate of how your financial situation could evolve over time and will pull in aspects such as the impact of additional income such as the state pension, as well as potential outgoings that you might want to test for – for example, the impact of elderly care costs should they occur in much later life.
Some of these points above highlight the complexities and nuances of pension planning and also speak to another key finding in our retirement survey: the regret of not having worked with a financial planning adviser only really hits as people get older. Anxiety increases as people approach and then progress through retirement, highlighting concerns about their preparedness for the latter phase of their lives. A qualified financial adviser can both help you ensure you are on the right financial track and also reassure you how to achieve that comfortable and fulfilling retirement you had planned.
This article was published in the i on 22 June, 2023.
Please note, the value of your investments can go down as well as up.
Netwealth offers advice restricted to our services and does not provide independent advice across the market. We do not offer advice in relation to tax compliance, personal recommendations with regards to insurance and protection, or advise upon the transfer of defined benefit pensions. When investing, your capital is at risk.
The answer here does not represent financial advice, nor should it be interpreted as a recommendation to invest.