Planning Your Retirement
Can you live on about £100 per week today? (Weekly State pension is £90.70 - Tax year 2008 /09)
That is what people without any other additional pension arrangements, will receive from the State today.
Could you live on less than £100.00 per week?
It pays to start retirement planning early, as it get harder later in life, leading to you having to contribute ever larger sums from earned income, as the time line get shorter as you near retirement age.
Why start early ?
Leaving it late can have an adverse affect of your standard of living, at a time when, you are unable to earn a living - in retirement, and will have to rely on the State to survive.
What is a Pension?
Simply put, a fund of money you have saved, that will enable you to purchase a pension for life (Annuity), at it's most basic form. Standard Annuities (pensions) are currently based at around 7% of the fund value, for people with no adverse medical conditions, and non-smokers. So, a fund valued at £100,000 on retirement today could buy a pension for life of £7,000 pa.(£135.00 per week). This is a generalisation, but today it will ring true to those who are having to purchase that annuity.
Income Drawdown
If you have a pension fund that is more than £100,000 (as a minimum) you can take this route. You are allowed to 'drawdown' a small amount of income, while the rest of the money stays invested. This is useful if you have an alternative source of income and can afford to wait till you are much older, before purchasing the annuity. You must remember that the invested fund could go down as well as up, depending on stockmarket conditions (greater risk).
So you can see, start saving early to grow this fund is imperative, and the earlier you start the easier it is to accumulate this lump sum. The amount you save is relevant to the fund value you wish to achieve on retirement.
Is there any help?
Yes. The HM Revenue giver you tax relief on the money you contribute at Basic rate (currently 2o%), and if you are a Higher rate tax payer, you can claim back the balance (120%) through Self Assessment. So, in effect you will be getting 40% tax relief (Higher rate tax payers only) on all contributions into a regulated Pension scheme. As a Basic Rate tax payer, you still get 20% tax relief on all up front contributions..
Where else can you grow money by 20% up front?
Nowhere. Except in the pension environment.
So, let's take an example:
You make a contribution of £1,000.00
HM Revenue tax relief is 250.00
Total into your scheme is £1,250.00
The Revenue returns all the income tax you have suffered in the first place.
All growth within the fund is: Tax-free; All income within the fund (Dividends) is also tax-free.
Even if you leave the contribution in cash you will have gained 20% before charges.
Even with modest growth rate, the fund will grow and your target could be achieved.
How much should you aim for ?
Generally, it is accepted that a pension of up to 75% of your current income should be sufficient to allow you to retire without having to depend on the State. However, the more you can get the more comfortable you will be in your twilight years.
Example
You are currently earning £25,000 pa Three quarters (75%) is £18,750 pa
State pension is currently £5,044 pa The shortfall is therefore: £13,706 pa
Based on an Annuity rate of 7% pa the fund value would have to be: £195,800 on retirement, to enable you to buy the pension (Annuity) of £13,706 pa (in today's money)
To create a retirement fund of about £225,000 over 25 years, you would have to save in the region of £7,000 every year, assuming a growth rate of 2% pa. So, the cost over the period is £105,000 if you received 40% tax relief on your contributions.
Can you imagine how much you would have to be saving per annum if the time line was just 15 years?
Where should you put your money?
Saving money is still saving money. So, we believe that sound investment principals still apply. The tax relief is the icing on the cake. Use a Platform (fund WRAP) that allows you to have access to the very best funds, and all the various types of accepted investment vehicles including Direct equities, and one with a Low charging structure. Lastly, take professional advice in choosing the correct asset allocation and asset class, to suit your risk profile and financial objectives.
We also offer a quarterly valuation service, and constant monitoring of the portfolio. This should ensure that your plans are on track.
We specialise in advising and managing money for our clients...
Call Today On 01299 271471 for independant financial advice