Historically, for most people, an income in retirement came from a combination of state and occupational and/or private pensions supplemented by savings. Pension income was secured by an annuity purchase giving a fixed income guarantee to provide peace of mind.
Like all other areas of financial planning the world has moved on with economic conditions, changes in legislation, historic low annuity rates, increased mortality, the increase in private buy to let property investors and dilution of occupational scheme benefits all impacting how we plan for our retirement – we like to call it leisurement. With more choice comes uncertainty – what is the best way for me to plan for when I stop working?
Some questions we are often asked with our response–
I don’t intend to retire so don’t need to think of retirement income
⤷ what if you cannot continue to work due to health, family pressures. Will there still be work for you to do?
I will inherit enough to give me an income when I stop working
⤷ our parents are fitter and living longer and spending inheritances. Long term care costs could very quickly exhaust any inheritance
My kids will take care of me –
I will sell my house and downsize
⤷ downsizing releases equity but how long will the cash last?
I don’t expect to enjoy long life expectancy
⤷ what if you are wrong and live to 90 (average mortality for men is now 85, women 88)
I have more important financial priorities now and will worry about pension income later
⤷ please don’t put your head in the sand as the issue will not go away.
I will buy another property and rent out
⤷ usually appropriate as part of a diversified strategy but consider initial and ongoing costs, rental void periods, borrowings, tax, and illiquidity
Most importantly diversity allows for effective use of all tax allowances – avoid paying tax unnecessarily.
Will I need more in the first 10 years of my retirement than the last 10 years as I expect to be healthier, fitter and more likely to want to do more and this costs money? I don’t want to sacrifice doing things and enjoying experiences early in retirement to be richer in my 80’s and 90’s when I don’t need as much money. How do I balance this objective?
The Government has made pensions far more flexible with its recent Pension Freedom legislation, making it far easier to plan for the retirement you want with 25% taken tax free from pension accounts as always. The difference now is the remaining 75% can be accessed (with income tax implications) in its entirety giving more scope for individual planning. Gone are the days where the state decides how and how much you receive income in retirement from your pension. We believe this all adds up to having more control over your lives which is always good news.
Kassius are strong advocates of an ‘eggs in baskets’ approach to retirement – be diversified insofar as hold formal pension provision, alternate investments, property, business assets (for company owners). Diversity ensures spreading risk – investment risk, economic risk, property depreciation risk, legislative risk, mortality risk.