The process of retirement planning is critical for all of us, irrespective of our current age, income, and financial state. It involves determining income goals for retirement and taking actions and steps to achieve those goals. Retirement planning has to start early so that you have identified sources of income, estimated expenses, managed risks, and implemented a savings program, well in time.
Retirement planning begins with determining how you plan to spend your retirement. It varies from individual to individual as some people are only looking at leading a modest lifestyle post-retirement while others aim at a comfortable retirement. The costs of a modest and comfortable retirement differ considerably; therefore, retirement planning begins with assessing and understanding your lifestyle goals and related income and expenses objectives.
Additionally, the state of one’s health, health of spouse and dependents, number of dependents, age of retirement, homeownership status, and travel goals also need to be considered for retirement planning. Whatever the case may be, retirement planning is of utmost significance as the cost of living keeps on going up each year, in addition to other factors like inflation.
When Do You Want to Retire?
The age of retirement is a critical deciding factor for retirement planning. There is no predetermined age of retirement in the UK; however, your current age and the desired age of retirement will put a lot of things in perspective and make for better and efficient retirement planning.
Traditionally, the age of 55-60 was considered to be the usual age of retirement. However, with time, many people have stopped waiting until the end of their retirement age to enjoy their lives and have started taking early retirement. However, you need a higher and more consistent source of income to support early retirement.
You should also consider the age at which you will start receiving the state pension. It is an important determinant for retirement planning because if you plan to retire before that age, you may need to work more and make more money before retirement to meet your retirement goals.
Retirement Income Plan
After determining the age of retirement, lifestyle goals, and financial goals, the next step is to take a closer look at the retirement income plan. The retirement income is mostly reliant on pensions; therefore, the different work pensions should be considered. You should look at the multiple work pensions, personal pension schemes, and consolidate the total amount that it translates to.
The retirement income plan, then, needs to be collated with the lifestyle goals and expense requirements. It is perfect when the post-retirement income is more than the cost of living. However, if the cost of living is more than the expected income, you should work towards ways to grow your funds and maximize your savings. The early withdrawal of funds from a pension and different ways to access pension account need to be considered at this juncture.
Types of Pension Plans
Pension is the most significant aspect of retirement planning. It is a long-term plan that helps you save while you work for your life after work. It is a pension plan that warrants a comfortable lifestyle even after you stop working and helps you support your medical emergencies, financial needs, and overall cost of living.
There are several pension plans available in the UK. Individuals who qualify for the new state pension, receive about £9,118.20 per year from April 2023, starting at the age of 65, as regular income to support their retirement. However, the harsh reality is that the state pension is not solely enough to maintain a comfortable post-retirement lifestyle.
Therefore, you should assess other pension plans, including workplace pension, defined benefits pension, defined contributions pension, personal pension, trust-based pension, and private pension. Workplace pension involves a contribution of at least 8% of the employee’s qualified earnings, including 4% employee contribution, 3% employer contribution, and 1% tax relief. The workplace pension schemes can have predefined benefits or a predefined contribution amount. On the other hand, trust-based pension schemes are run by a board of trustees who take all the decisions related to the pension investments.
For self-employed people or those who want to manage their pension on their own, personal or private pension schemes offer higher flexibility and better returns. These schemes are usually used to top-up workplace pensions, by self-employed people, or by unemployed individuals who can afford to pay into a pension scheme. A Self Invested Personal Pension such as Moneyfarm Private Pension is an example of a private pension scheme that offer high flexibility, transparency, and decision-making over the investments in the pension funds.
Tax Relief on Pensions
The government provides several tax benefits on the contributions made towards pension schemes. The tax benefits are in proportion to the income tax band of the taxpayers and range between 20% and 45%.
For example, basic taxpayers get a tax relief of 20% on the contributions made towards their pension accounts. So, for a £10,000 contribution to the pension account, tax is to be paid on just £8,000, while the remaining £2,000 gets added to the pension tax relief pot. However, there is an upper limit to this tax relief, and it is called an annual allowance. You can get tax benefits only on £40,000 or 100% of your income, whichever is lower. Any contribution over and above this amount is not eligible for tax benefits.
Therefore, be aware of the tax rules, benefits, and regulations around the different pension types to manage your pension and retirement efficiently. Similarly, the tax on withdrawal from pension accounts also varies depending on whether it is a lump-sum withdrawal, flexi-access income drawdown, or a combination of both.
The risk appetite of individuals also contributes to their retirement planning. You should determine if you are risk-averse or a risk-taker, depending upon your age, financial stability, income sources, and overall financial standard. Accordingly, you can choose to contribute towards different pension schemes, with varied investment portfolios, asset types, geographies, and currencies.
Thus, retirement planning is an extensive and intricate process. It takes a lot of time, effort, and dedication to assess your retirement age, sources of post-retirement income, different pension schemes, and chalk out an ideal retirement plan. The process should begin as early in life as possible; however, it is never too late to start.