Retirement is a significant milestone in life, one that marks the transition from decades of work to a period of relaxation, personal pursuits, and hopefully, financial security.
In the UK average life expectancy is increasing, which is well publicised, planning for retirement has never been more crucial. A well-structured and dynamic retirement plan ensures maintenance of a desired lifestyle, meet unforeseen expenses, and leaving a legacy for loved ones. There are many positives for planning ahead for retirement mainly so clients can enjoy their hard-earned rewards and more importantly time. We have seen over £6bln of assets analysed across the last 12 months with over 17,000 cases being run.
Why Planning Ahead is Crucial
- Financial Security: The most compelling reason we plan is to secure a comfortable financial future. The earlier we start saving and investing for retirement, the more time our money has to grow. With the power of compound interest, even small, regular contributions to a pension pot can accumulate significantly over time.
- Inflation Protection: Inflation (The Gain Killer as some might call it) erodes the purchasing power of money over time. By planning and investing in growth-oriented assets, you can help protect your client’s retirement savings from the impact of inflation. Without adequate planning, they may find that their savings are insufficient to maintain their standard of living. Interestingly nearly 85% of cases are run using a monetary figure rather than a percentage rate such as the previous 4% rule (GAD rate) for income with inflation taken into account.
- Stress testing the outcomes: In over 25% of cases, we see advisers using our stress testing functionality where you can replicate past market performance and show the actual returns in the marketplace. As we know past performance is no indicator of future performance but as we have seen of late 2024 has been a year of few shocks with Tech stocks leading the way yet again.
- Freedom to Choose Your Retirement Age: Planning ahead gives clients greater control over when they retire – doesn’t that sound fabulous? If they have a solid retirement plan, they may be able to retire early, or at least not be forced to work longer than anticipated or from what we are seeing cut back on working hours and ease into full retirement. There have been many studies in recent years that highlight how we thrive staying within a community for longer or having a purpose – these things keep you motivated and stimulated daily. Alternatively, this freedom is especially valuable if health issues or changes in personal circumstances necessitate an earlier retirement. Only 20% of the cases analysed included a partner, if you consider a working couple would most likely get a full State Pension each, plus any additional private investment returns it really does present some opportunities for the next season of life.
- Peace of Mind: Knowing that Clients have a robust retirement plan in place can provide peace of mind, reducing stress and anxiety about the future.
- Steps to Effective Retirement Planning in the UK: As well as investing Income, Protection and Critical Illness Cover are also essential to review, and at the very least should be considered. We also see that sometimes the older you get the more expensive this can get, another reason to plan ahead early.
What can we do?
- Assess Your Retirement Goals: You can help your clients by determining what kind of lifestyle they want in retirement. Do you plan to travel, downsize your home, or perhaps relocate to a different part of the UK? Clients goals will influence how much money they need to save.
- Understand Your Pension and Investment Options: In the UK, there are several types of pensions:
- State Pension: This is the basic income provided by the government. As of the current year, the full new State Pension is £203.85 per week, but the amount received depends on National Insurance contributions. We see the State Pension included in over 50% of cases which suggest the demographic is varied for our clients – in other words not just clients at retirement but those also starting the journey looking for guidance and possibly what if there is no State Pension.
- Workplace Pensions: These are pensions arranged by your employer. With auto-enrolment, most employees are now automatically enrolled in a workplace pension, where both they and their employer contribute.
- Personal Pensions: These are private pensions clients set up with your help. They offer more flexibility and can be tailored to their specific retirement goals.
- ISAs (Individual Savings Accounts): ISAs are a tax-efficient way to save or invest money. There are several types of ISAs available:
- Cash ISAs
- Stocks and Shares ISAs
- Lifetime ISAs (LISAs
- Innovative Finance ISAs
- Junior ISAs (JISAs)
- Property and Buy-to-Let: Investing in property is a popular choice in the UK due to the potential for both capital appreciation and rental income.
- Stocks and Shares including Exchange-Traded Funds (ETFs) and Mutual Funds: Directly investing in the stock market allows clients to buy shares in individual companies. While this can be risky, it also offers the potential for significant returns, particularly if invested in growth stocks or dividend-paying companies. Clients can also invest in:
- Bonds Government Bonds (Gilts) and Corporate Bonds: Bonds are debt securities issued by governments or corporations to raise capital. When you buy a bond, you are lending money to the issuer in exchange for periodic interest payments and the return of the bond’s face value at maturity.
- Peer-to-Peer Lending: Peer-to-peer (P2P) lending platforms match individual lenders with borrowers, allowing clients to lend money directly to individuals or small businesses. The potential returns are higher than traditional savings accounts, but there is a greater risk, particularly if the borrower defaults.
- Commodities including Physical Commodities and Commodity ETFs: Investing in commodities such as gold, silver, oil, or agricultural products can provide a hedge against inflation and currency fluctuations. Commodities tend to perform well during periods of economic uncertainty, making them a valuable addition to a diversified investment portfolio.
- Cryptocurrencies: Cryptocurrencies like Bitcoin and Ethereum have gained popularity as an alternative investment. They offer high potential returns but come with significant volatility and risk. In the UK, cryptocurrencies are subject to capital gains tax, and it’s essential to understand the regulatory environment before investing.
- Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EIS): These are government-backed schemes that offer tax incentives to invest in small or startup companies:
- Venture Capital Trusts (VCTs): VCTs are publicly listed companies that invest in small businesses. They offer tax relief on dividends and capital gains, making them an attractive option for high-net-worth individuals.
- Enterprise Investment Schemes (EIS): EIS allows clients to invest directly in small, high-risk companies in return for significant tax breaks, including income tax relief and exemption from capital gains tax.
- Savings Accounts: Traditional savings accounts are a safe place to keep money, offering a guaranteed return. However, interest rates on savings accounts in the UK are currently low, meaning they might not keep up with inflation. High-interest accounts, fixed-term bonds, or premium bonds might offer slightly better returns but still provide security.
- National Savings and Investments (NS&I): NS&I offers government-backed savings and investment products, including Premium Bonds, Income Bonds, and the NS&I Direct Saver. While these products offer safety and security, the returns are typically modest compared to other investment vehicles.
- Maximising Contributions: The more clients contribute to their pension, the better. In the UK, you can benefit from tax relief on contributions up to certain limits. For example, basic rate taxpayers receive 20% tax relief on their contributions, effectively boosting every £80 contribution to £100. Higher rate taxpayers can claim even more.
- Diversifying investments: Relying solely on a pension may not be sufficient. Diversifying investments—such as in ISAs, property, or stocks and shares—can provide additional income streams in retirement. The UK’s ISA allowance currently allows investment up to £20,000 per year tax-free, making it a valuable tool for retirement planning.
- Review and Adjust Regularly: Retirement planning is not a one-time activity. A regular review of your clients financial plans are essential to ensure they are on track to meet their goals. Life changes such as marriage, divorce, or inheritance may require adjustments to such plans. We have reviewed over 17,000 cases run by our users analysing over £6bln – the average pension pot is over £155,000 but with our tool you can also include any asset/investment or income stream so therefore giving the client a clear picture of future returns.
- Consider Long-Term Care: As your clients age, the need for long-term care may arise. Planning for potential care costs is crucial, especially given the rising cost of care in the UK. Consider options such as long-term care insurance or setting aside a portion of savings for this purpose.
- Estate Planning: Ensures that your client’s assets are distributed according to their wishes after death. This includes writing a will, setting up trusts if necessary, and considering inheritance tax implications. Proper estate planning can prevent legal complications and reduce the tax burden on the estate.
Conclusion
Planning for retirement is one of the most important financial decisions anyone will make. By taking the time to assess goals, understand the options, and make informed proposals, you can help secure a comfortable and fulfilling retirement for your clients. The UK has over 7,000 Financial advice firms that offer numerous services to help clients save and invest wisely, but the key is to start as early as possible. Whether they are just beginning their career or are approaching retirement, it’s never too late—or too early—to start planning for their future. A recent study suggests putting £300 per month into a Junior SIPP for a child from birth for 18 years would give them nearly £110,000 (taking inflation into account) If they continued the same contribution, it would be worth over £1.6mln. It’s worth thinking about isn’t it…..The Power of Compounding never felt so relevant.