Retirement: when you’ve climbed the mountain and it’s time to enjoy the view, to put your feet up and take some well-earned rest and relaxation. But it’s rarely that simple! With people living longer than ever, retirement can last for 30 years or more and being able to enjoy a standard of living that you’ve dreamed of requires planning and saving much earlier in life.
Contributing to a pension from a young age has been drummed into us as the best route to a financially secure retirement but high profile big business collapses and the subsequent impact on pension funds has left people with less confidence in their pension. Fortunately, pensions are protected and they remain a tax-efficient way of saving for your later years, your employer contributes and there are flexible ways to access your money after you turn 55.
The good news is you’re unlikely to end up taking out less than you put into your pension but these days, it’s wise to consider a pension as one part of your retirement savings strategy. So, what other elements can bump up your retirement funds?
- Property – either your own home or an additional property that you let out or intend to sell
- Savings and investments – a variable income which can go down as well as up
- High-value possessions – cars, antiques, jewellery
- Paid work – many people choose to work longer or semi-retire
- Trust funds or inherited income
How much will I need?
That’s a tricky question. On retirement, your spending will alter just as your income does, so it’s a good idea to draw up a budget of how much you might spend to give you an idea of how much income you’ll need.
Can an ISA provide a retirement income?
More and more people are turning to ISAs for their long-term savings. There are different types of ISA that offer tax-free saving up to £20,000 a year. A Cash ISA allows you to access funds at any time whilst a Fixed Rate ISA ties up your money for a set time. Also on the market are Stocks and Shares ISAs where your capital is subject to possibly significant fluctuations, and a Lifetime ISA (which you can have as cash-based or stocks and shares based).
A Lifetime ISA is open to 18-40-year-olds, allowing you to save up to £4,000 per year with the government contributing 25% too. You can access the money after the age of 60 without paying a 25% charge. Your payments stop when you turn 50 but your savings still earn interest for cash-based investments or have the capital value movements/dividends of an underlying stock and shares investments.
Property vs. Pension
Property is still considered by many to be a long-term sound investment but the less attractive buy-to-let situation and fluctuating house prices mean that it’s not the retirement saviour it perhaps once was.
Despite the challenges of mortgage tax relief, landlord licensing, EPC rating, higher capital gains tax, problem tenants and increased running costs, property investment can still be profitable. Combining rental yield and capital growth provides a regular income and potential long term profit, but managing your property portfolio is much more time-consuming than paying into a pension and property is subject to inheritance tax as part of your estate, though there may be options available to address this.
My home is my pension
Be careful with this strategy. It can be difficult to sell up and downsize when you’ve lived there for many years and there are significant costs associated with moving. Borrowing money against your home while you live there through an equity release scheme can also be an expensive option.
So a mix of pension and non-pension income appears to be the most secure and flexible way to provide for a long and happy retirement. Talking through your options with an independent financial advisor is essential – and don’t leave it too late!
This is designed as generic guidance and specific financial advice should be taken for your individual circumstances. For advice on all things accountancy, tax and business planning, get in touch with CRM on 01865 379272.