Farley And Partners

Planning for retirement

Most people recognise that their retirement plans do not look as healthy as they did a decade ago. Stock Market collapses have destroyed most people’s compounding calculations while low interest rates are reflected in low annuity rates which continue to be adjusted downward to reflect higher life expectancy. Against this background, how do you plan to have a ‘comfortable’ financial retirement?

Case study

Sainey will earn D55,000 in 2017/18. He will invest D12,500 into his personal pension policy. He has no other income and claims only the standard personal allowance. 

Sainey will write out a cheque to his pension provider of the premium, net of basic rate tax relief, D18,000. Sainey is also entitled to higher rate tax relief on the gross premium, amounting to D2,500. As Sainey is an employee, we can ask GRA to give the relief through Sainey’s PAYE. Otherwise, we would claim relief in Sainey’s 2018 Tax Return.

Thus the net cost to Sainey of a D12,500 contribution to his pension policy is just D7,500.

You will normally have selected one fund, or a spread of funds, for your pension savings. Would a switch give you more security or the scope for more growth?

Premiums on personal pension policies and stakeholder pensions are payable net of basic rate tax relief at source, with any appropriate higher rate relief usually being claimed via the Tax Return.

SIPPs

In response to poor performances from pension fund managers, some retirement savers have switched their pension savings into Self Invested Personal Pension schemes (SIPPs) – a form of personal pension plan which gives the investor much more influence over how the funds are invested. This will be very good for those looking for an additional pension apart from the standard Social Security Contributions.

Company pensions

There are two kinds of company pension scheme, into which you and your employer may make contributions. A final salary scheme (Social Security) pays a retirement income related to the amount you contributed when you stop work, while a money purchase scheme instead reflects the amount invested and the underlying investment fund performance. In both cases, you will have access to tax free cash as well as to the actual pension. 

The impact of stock market downturns has taken its toll on pension funds. Losing the effect of the compounding of investment growth – coupled with much lower annuity rates – has resulted in many schemes losing value and as a consequence being underfunded. 

As a consequence where companies now provide company pensions these are now almost entirely based on ‘money purchase’ arrangements, under which no guarantee of the eventual pension available is made. 

Those already in company pension schemes should be aware that the rate at which contributions can be made by the member is now limited and total relevant earnings, subject to scheme rules. Where your employer contributes on your behalf there is no earnings related limit, and only the annual limit applies.

Personal pensions

Investment in personal pensions is limited and the amount of your relevant earnings, but subject to the annual allowance and any unused allowance from the previous three years in all years except the year in which you retire.

Planning strategy

As well as your age, your retirement planning strategy will be determined by a number of factors:

Is there a company pension scheme?

  • Are you self-employed?
  • How old are you?
  • How much can you invest for retirement?
  • How much state pension will you receive? 

For a forecast of your state pension, phone Social Security.

You can estimate your post-retirement living expenses at roughly 60-80% of your current living expenses. Studies have shown that, comparing people aged 45-54 and those aged 65 or more, the average reduction in expenses is:

Personal care, light and food 35%
Housing and furnishings 39%
Entertainment 50%
Clothing 56%
Insurance 85%
Education 88%

While the above table represents an average some other questions may assist in helping you calculate what income you might need in retirement.

  • Will your car costs now be payable by you personally instead of by the business?
  • What additional personal costs will you incur? e.g. holidays
  • Will your hobbies cost you money, or maybe earn some income for you?
  • What family costs might you still incur? e.g. weddings, house deposits, grandchildren
  • Will you continue to save?

Private pensions

If you are not in a company scheme, you should make your own arrangements, since relying on the state pension is already unrealistic, and will become more so with each passing year.

Retirement annuities

Available only where a policy currently exists.

Start now

Although it’s never too late to plan for your retirement, the earlier you start, the more chance you will have to accumulate the funds you will need.

In the current climate, whether you choose to focus on pension savings, alternative savings products, or a combination of both, your savings will need time to grow.

To create a retirement fund of about D225,000 over 25 years, you would have to save about D7,000 every year, assuming approximately 2% growth. Saved in an ISA, the cost over 25 years would be D175,000, compared with D105,000 if you obtained 40% tax relief on your pension policy premiums. 

On the other hand, at retirement, the pension policy would provide a tax free lump sum and an income, while the funds in savings would be available to draw, free of tax, immediately (or they can be drawn before retirement, subject to plan rules). 

Partly influenced by poor returns from pension policies and adverse publicity regarding pension companies coupled with lower annuity rates, many people are now spreading their savings between company or personal pension schemes and other forms of investment.

Do contact us if you would like further help or advice on this subject. 

Will the state pension suffice?

Even if it is not currently top of your agenda, being able to retire when and how you would like, is sooner or later likely to be one of your most important financial objectives. But achieving this goal takes planning and perseverance. 

Unless you are in the fortunate position of having a final-salary pension scheme which is not underfunded you will almost certainly need to augment your state pension. You could spend a third of your life in retirement. Will you find those years the golden times we all dream of, or a constant struggle to pay the bills?

Your state pension is worth about D6,030 at current rates, assuming you have a full Social Security record. For those reaching state pension age, this requires about 30 years’ contributions. If you have not yet retired, we can help you check your record and see if any gaps can be filled. 

A review of your state pension entitlement will also indicate what you may expect to receive. 

The state pension age (SPA) is also changing and it is far from clear that we have the final definitive position. 

The Government has announced that the state pension will in future increase by the highest of price inflation and earnings inflation.

According to government estimates, the gap between how much people are saving and how much they need to save to ensure a comfortable retirement is over £60 billion. It believes that 13 million people – nearly half the working population – are not saving enough for their retirement. 

Your home as a source of finance?

Although they might not be suitable for everyone, there are at least two ways to use your home to boost your retirement finances. First is down-sizing – selling your current home and buying something cheaper to release value now tied up in your property for other purposes. If you wish to continue living in the same property, ‘equity release’ might be something to consider. There is more than one form of equity release. Equity release will not suit all families, and you need to discuss all of the implications with us and your other financial advisers.

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