Income into retirement planning to secure long-term funds
When it comes to thinking about income in retirement, many people terribly underestimate the level of financial resources they will need to live comfortably in retirement. Thanks to modern medicine and better health care, we are living on average much longer than previous generations, but our expected target retirement ages have not adjusted accordingly. People don’t like to think about their mortality and if they do, they tend to refer to the lifespan of relatives like grandparents or elderly uncles and aunts. In truth, we can live much longer and also more active lives. While this is clearly good news, the funding costs are much higher than we might imagine and that is before considering the potential costs of care in our twilight years.
Invest early for good retirement income
As with all areas of investing, the earlier you start the better, as assets have more time to grow and benefit from the effect of compounding. It is a big mistake to think that you can put off your retirement savings until you are in your 50s. By the time you are in your 50s, you may not have enough time left to build up the financial resources you need to retire in your early to mid-60s, so the first pound you invest will be your more valuable.
Evaluate the right level of risk
One of the main challenges is to take sufficient risks. A younger investor, with a very long-term horizon, should invest mainly in equities to accumulate a sufficient pot of assets. But even those nearing retirement need to be very careful not to lower their risk too soon. Previously, most people with a defined contribution pension started to switch from stocks to bonds as retirement approached, so the value of the pension fund would not be vulnerable to liquidation. market on the eve of a decision to buy an annuity. The old theory is that you should “own your age in bonds,” which means that a 50-year-old should have 50% of their pension in bonds rather than in stocks. In my opinion, this is no longer true.
As more and more people avoid annuities and decide to keep their pensions and withdraw income instead, it is very important that the portfolio continues to grow ahead of inflation, otherwise the pension might be depleted too quickly, leaving the retiree short of assets. halfway through retirement. If you are considering going the withdrawal route, it is really essential that you make sure that you don’t deplete retirement assets too quickly and that you revisit your strategy every year. Ideally, you should project your costs and likely income needs and ensure that the natural income from the pension will be enough to meet them (alongside any state pension), then manage the portfolio with an asset mix. to ensure the value of the plan in real terms will not be eroded by inflation. In effect, this means continuing to have some exposure to the stock markets until retirement.
Pensions for estate planning
For some people, namely those who have other assets – like ISAs or property – that can be used to fund their retirement, it may make sense to leave their pensions intact for as long as possible. This is because modern pensions are incredibly tax efficient from an estate planning perspective. Unused pensions can be inherited by your beneficiaries without paying inheritance tax. If you die before age 75, annuities are inherited in full tax-free and after age 75, beneficiaries will pay tax at their marginal income tax rate as they are withdrawn. So for wealthier savers, a pension may not be a retirement savings plan at all, but an estate planning tool.
Jason Hollands is Managing Director, Business Development and Communications, Tilney Investment Management Services
Further reading: Women’s pensions should be addressed as they save less than men