Planning for retirement

Introduction

Retirement often means that earned income ceases, which is likely to mean a reduction in overall income. This may affect your standard of living - but you may have income from other sources, perhaps as a consequence of inheriting money.

The circumstances of most people, combined sometimes with the fact that many people give pensions low priority in their younger and middle years, means that few retire on the maximum pension benefits permitted by the Inland Revenue - either from an occupational pension scheme or from a personal pension.

The combination of the above points could lead to an uncomfortable retirement for many people through insufficient income.

Clearly long-term pensions planning is, therefore, very important. Planning should aim to bridge the gap between pre-retirement income and the required level of income in retirement. Bearing in mind that the maximum from an occupational scheme will be no more that 2/3rds of pre-retirement earnings, some careful planning is required if retirement income is to be anything like the income you enjoy whilst working.

Factors to take into account when planning a minimum pension requirement:

regular expenditure: what is your expenditure likely to be in retirement the need to build reserves to meet any unexpected expenditure allowances for care in old age inflation

The following also need to be taken into account in your pension planning:

Age: the older you are the less time your retirement fund will have to grow. The younger you are at retirement your fund is likely to be smaller and annuity rates will be lower - annuity rates get higher with age. (If you are not in an occupational pension scheme, the most common option to provide you with income in retirement is to buy an annuity with your pension fund). Income: will directly affect your pension income in an occupational pension scheme. Income will also determine what your maximum contribution can be into a personal pension scheme. Generally, you are allowed to make higher percentage contributions from your income the older you are. With an occupational scheme, it may also be possible to top up your pension by making voluntary contributions. The more you earn, the more you can invest in your pension. Dependants: will affect your decisions both during working life and in retirement. Both before and after retirement you have to consider the cost of providing protection for dependants in case of your early death (indeed before you retire protection will be necessary if you are ill or have an accident and can no longer work). After retirement, providing protection (or even providing a pension for dependants) will be a drain on your own pension income.

In planning your retirement arrangements the following are important considerations:

Pension products must only be used for the accumulation of funds to provide an income on retirement. Governing legislation does not provide the flexibility to enable the pension scheme to act as a savings contract i.e. once contributions are paid in, they are inaccessible and may only be taken as pension (or pension and cash) at retirement. The most essential use of the products is to top up inadequate State Pensions. The tax free cash element (which the Inland Revenue allow on most pension schemes) may provide cash at retirement to repay loans or any number of other uses.

Certain circumstances may prove problematical in pension planning terms:

Scheme members whose salaries exceed the earnings cap laid down by the Inland Revenue. This will limit the amount which can be paid into your pension scheme. Scheme members who have only a short time to go before retirement as the pension fund will not have time to grow. In the above circumstances, planning will need to be supplemented by other investments.

REMEMBER You should not use any information contained on this page as the basis of any action until you have discussed matters with your financial adviser.