The importance of retirement planning

For most people, the days of the generous final salary pension scheme that you can rely on are long gone. A financial plan can make a great deal of difference, both to your money situation, and your confidence that you are making the most of the assets at your disposal.

There have been three changes to the pensions landscape that have created the need to plan ahead for the long road to retirement and at (and during) retirement:

The State Pension

The age at which the state pension starts to be paid has gone up to 66 and will be going up to 67 and may increase further. The full state pension is £9,334 per year and on its own, is unlikely to be enough to give you the income you want, but it is a valuable starting point. Also, you may want to stop working earlier.

Pension freedoms

It used to be that most people’s only option was to buy an annuity, meaning that they had to use their accumulated pension funds to buy a guaranteed income for life. This changed in April 2015 and now you can choose to draw money from your pension funds in a way that suits you. The first 25% is still tax free, but the rest is added to the rest of your income, for example from the state pension, and is taxed accordingly.

The main advantage is that you retain the capital you have built up and have the flexibility to use as much or as little as you want. You can also leave the remaining funds to whoever you wish, and they are not usually included in inheritance tax calculations. It may make sense for you to use ISAs or other savings before using your pension funds.

However, drawing down from your pension funds does mean that you have to take some risk with your pension funds as they will be invested, and you will be responsible for making sure you have enough money for the rest of your life.

Delaying buying an annuity could mean you can buy a higher income. The amount of income you can buy with an annuity (the annuity rate) is very low at the moment. Not only may this increase in the future, but the annuity rate increases with age, and with many health issues.

Here are some indicative rates for how much annual income £100,000 would buy for a 65-year-old:

Source: Money Advice Service

Changes to employer pensions

Very few private sector companies still offer salary-based pensions. All employers are now required to automatically enrol their staff into a pension into which they and the staff members pay to help fund retirement. Auto Enrolment has been very successful and pension savings across the UK population have increased sharply since it was introduced. However, as a result, many people will accumulate several pension pots of which they will need to keep track as they move jobs through their careers This creates a question of whether they should gather their pots together to make administration easier and to potentially save costs and improve investment strategy.

Explore our financial planning services to see how far your money could go.

These changes taken together mean people need to take more responsibility for planning their retirement. Questions you may want to consider when planning ahead.

While you are still saving:

• Am I saving enough?
• Are different routes possible – eg, ISA v pension?
• Are my funds invested in the right way?

When starting retirement:

• What sort of retirement can I look forward to and how much will it cost?
• What is the best way to fund my retirement – annuity vs drawdown?
• Different routes – the tax treatment of each?

This can sound daunting, but help is available. Charles Stanley has developed Charles Stanley Direct Financial Plans to help you answer these questions and know what to do next.