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How much is enough for a comfortable retirement?

Most people have an idea of the level of income, or rather the standard of living they would like to have in retirement. However, the reality is that most are not saving enough now to achieve their future retirement objectives.

Most people have an idea of the level of income, or rather the standard of living they would like to have in retirement. However, the reality is that most are not saving enough now to achieve their future retirement objectives.

Charles Stanley

in Features


By Stuart Walton and Rachael Cornwell, Financial Planners

Many will suspect they are not saving enough, but may not have a clear idea of how much more they need to save to ensure their financial security. This lack of clarity regarding retirement provision is partly the result of our working patterns. The days of working for one employer from leaving school until retirement are long gone. Many individuals will change employers several times over the course of their careers and some will have more than one employment concurrently.

A trail of deferred pension arrangements can often be found in the wake of these employment changes, but there are steps that can be taken to ensure future financial security.

Planning for later-life living/long-term care and the strategies one could employ

Establish what you have. You should receive annual statements for those deferred pension arrangements. If you do not have up to date statements, contact your employer and previous employers to obtain them.

As well as telling you what they are worth now, those statements should also tell you what they might be worth at retirement and many are now adjusted to take account of inflation. Remember these are just a guide, based on a number of assumptions regarding investment performance, they are not a guarantee. At the same time you can also apply for a State Pension forecast too using the following link https://www.gov.uk/check-state-pension

Think about what you think you’ll need. Give some real thought to what you would like your retirement to look like, what goals and aspirations do you have? This will very likely be the first time that you have an empty calendar and time to fill it with travelling or leisure pursuits. Many people often find that the early years of retirement when you are most active are the most expensive, but it is also important to remember that long-term care costs in later life can be considerable.

Give some thought to your standard of living now and think about how that could contrast with retirement. Your expenditure on holidays and leisure pursuits may increase, but your housing costs could be lower. As a minimum, we would suggest targeting a retirement income of two thirds of your current income.

Review your pension contributions and investment strategy. Can you afford to contribute more than you are currently? If so, how much more? Ultimately, how much you will need to contribute will be dependent on how much you have already accumulated. That being said, there is a limit on tax relivable pension contributions.

 An individual is limited to “tax-relievable” contributions of, the greater of £3,600 gross per annum, or 100% of relevant UK earnings in the tax year they pay the contribution. Employers can also contribute to a member’s pension. Although pension savers may receive tax relief on contributions, there is also a limit which affects the tax efficiency of pension contributions without incurring an income tax charge. This limit is called the annual allowance and is currently £40,000 per annum for the 2019/20 tax year. Individuals with income exceeding £150,000 per annum are subject to the tapered annual allowance, meaning their annual allowance of £40,000 is reduced by £1 for every £2 of income over £150,000. The maximum reduction is £30,000, meaning someone with an income of £210,000 or more would have an annual tax relievable pension contribution allowance of just £10,000 per year.

With regards to the investment performance of your pensions, you should consider how they are currently invested and the returns being delivered. Many workplace schemes will be invested in default funds that may not deliver the best performance. You should seek financial advice to ascertain how to invest your pension funds to maximise investment performance in line with your attitude to investment risk.

Give consideration to other savings vehicles. Pensions are not the only options available for saving for retirement. Many people also contribute to Individual Savings Accounts (ISAs) and some like to build up a property portfolio to support them in retirement. Other savings vehicles are particularly attractive for those who have significant pension savings, as there is a limit on the overall size of pension saving that can be accumulated without a significant tax charge. The lifetime allowance is £1,055,000 for the 2019/20 tax year. Pension savings above this amount could be subject to a 55% tax charge on the excess.

Consider when you want to retire. Your pension savings can be accessed from age 55, so you should give some thought to when you would like to retire. This will provide a timeframe for building your retirement savings and a timeframe for how long those savings need to be able to support you (based on standard mortality assumptions).

The earlier you access your pension benefits the less time you will have to save and the longer those savings will need to support you. It may be that you have more than enough built up already and you are currently unaware that you could retire earlier, or it may be that you have a shortfall and need to consider saving more or delaying retirement. Either way we can assist you in building a financial plan to determine you current circumstances and address your retirement provision.

Start Planning Now. The key piece of advice is that it is never too early to start planning for your retirement. Many people do not consider whether they have enough to support their needs until their retirement is imminent, leaving little time to correct any deficit, or finding out that they could have retired earlier. The earlier you start saving the longer you have to build a retirement fund.

This is, of course, easier said than done, as earning potential tends to be lower in your younger years and the financial burdens of home buying, marriage and children can eat up the bulk of your income, but even a small contribution at this stage is better than nothing as delaying saving can have a dramatic effect on the value of your future pension funds.

How to best plan for inheritance and passing on wealth?

Will: The first and most important area of estate planning you should consider is establishing or updating your will. This will ensure that your wishes are carried out and your estate is distributed to the beneficiaries you want. Mirror wills set up with your spouse mean that you leave your estate to the other in the event of your death. Consideration should also be given to transferring some of your assets to children or grandchildren after the death of the first spouse; depending on circumstances.

We recommend you seek legal advice so that your will is set up in a tax-efficient manner.

Lifetime Gifts and Annual Exemptions: When planning to mitigate inheritance tax there are exemptions:

• Annual gift exemption – £3,000 each year. Any unused part of this exemption can be carried forward into the next year but cannot be claimed unless the current year’s exemption of £3,000 has been used up. If you have any remaining allowance to carry forward from the 2018/19 tax year, it will be lost after 5 April 2020.

• Small gifts – £250 to an unlimited number of recipients each year.

• Wedding gifts – up to £5,000 depending on the relationship between the donor and the recipient.

In addition to the exemptions above, there may be opportunities to start a pattern of gifts that would qualify for the Normal Expenditure out of Income exemption. Outright gifts are generally exempt from inheritance tax if they are:

• Paid out of surplus income (not capital).

• Made regularly as a pattern of gifts.

• Do not reduce your normal standard of living.

There is no tax charge on lifetime gifts to individuals or certain types of trust provided the donor lives more than seven years from the date of making the gift; these are known as Potentially Exempt Transfers (PETs). Once the above exemptions have been used, consideration can be given to taking lifetime gifts to control the size of your estate, although not dependent on tax year end.

Trusts: Setting up a trust can:

• Reduce an inheritance tax liability by keeping money or assets outside of one’s estate.

• Protect a family’s legacy by controlling how assets are used by future generations.

Investment Planning: Shares listed on the Alternative Investment Market (AIM) are exempt from inheritance tax after holding the investment for two years as they qualify for business property relief. Other investments such as Enterprise Investment Schemes (EIS) also offer the same benefit once held for two years.

These types of investments are classed as high-risk investments and you should consult your Financial Planner to ensure they are suitable for your investment strategy and risk profile. To read more about Charles Stanley’s service click here.

Life Insurance: Set up a life insurance policy that lasts for as long as you live through a “whole of life” policy. This policy should be written in trust so the proceeds can be used to pay, or reduce, the potential inheritance tax liability on your estate.

Pensions: Leaving your pension fund as a legacy for your family can be an effective and tax-efficient way to pass on your wealth.

If you die before you are 75, the full value of your pension fund can normally be paid to your nominated beneficiaries as a tax free lump sum or tax free income. If you die after age 75, the death benefits will be taxed at the beneficiaries’ marginal income tax rate.

As pensions are outside of one’s estate for inheritance tax purposes, you can pass down wealth through family generations by withdrawing a retirement income from alternative investments, savings or assets; effectively preserving the pension fund.

This article does not constitute advice. To find out more about retirement planning talk to a Charles Stanley Financial Planner. Tax treatment depends on individual circumstances and may be subject to change in the future.

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