Guide to retirement planningPreparing for the retirement you want, one step at a time

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Need help planning for your retirement?

Whether your retirement is still many years away, or that little bit closer, Ascot Lloyd’s team

of experienced independent financial advisers can help you to make sense of the retirement

planning process. We will work with you to understand your retirement goals, prepare for the

right level of retirement income, and choose the best pension solution for you.

Get in touch to tell us about your retirement goals and arrange a free initial consultation

with one of our advisers. Call 0345 475 7500 Visit www.ascotlloyd.co.uk Email info@ascotlloyd.co.uk

Introducing retirement planning

The so-called ‘twilight years’ are no more. These days, retirement increasingly means entering

an exciting, active phase of life, filled with travel and new hobbies.

Have you thought about what retirement means to you, and planned how you will fund your retirement? If you have not got a plan in place, you’re not alone. Thankfully, it is not too late to get started.

Preparing for the lifestyle you want in retirement

Retirement planning involves identifying your key goals for retirement, and then charting a course that will help you achieve those goals through financial planning.

Key considerations for retirement planning include:

• Your personal/lifestyle goals

• How much money you will realistically need to live on during retirement

• Your current pension savings and anticipated retirement income

• Other factors, such as inheritance tax and what to do with the family home

In this guide, we will look at all four areas in turn and see how each consideration might affect your retirement strategy.

Why we all need to start planning for retirement

The trend towards active retirements and generally longer, healthier lives – coupled with concerns about the sustainability of state pensions – means that we all need to be much more proactive when it comes to funding retirement.

In other words, if you want to achieve the kind of retirement you have in mind, it is vital you take action now. This guide will help you get started.

When will you retire?

The first question to address as part of your retirement planning is this: at what age do you plan to retire?

Traditionally, retirement was always seen as a clear-cut event – you begin drawing your pension at the pre-determined age, give up work, and that’s it. Now, retirement is more of a gradual process than a big step change.

Some people actively prefer to stay in work, while others may wind down their hours and start drawing their pension gradually over many years. Some may leave their career but take up a part-time job, and others may have no choice but to continue working full time as long as possible to get the standard of living they want in later life.

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Setting your retirement goals

However you want to spend your retirement, creating a clear picture of your

retirement goals is the first step towards making sure those goals become a reality.

Early retirement

Like many people, you may be harbouring a dream to retire earlier than the state pension age. Whether this is a realistic option for you will depend on what type of pension you have and the size of your pension pot. For example, defined benefit or (final salary schemes) usually set a retirement age of 65 and it may not be possible to draw your pension sooner.

Whatever retirement age you are working towards, keep in mind that the earlier you retire, the longer your pension pot will have to last. Always work with a financial planner to understand what is feasible for you.

Do you have a plan B?

As the saying goes, best-laid plans often go awry, and life has a habit of throwing the odd curve ball. One study found that 39% of workers surveyed had to retire sooner than planned, most commonly because of poor health or job loss. Despite this, globally, just one-third of workers have a backup plan in the event that they are forced to give up work before their planned retirement age.

Redundancy or ill health can turn even the most thoughtful retirement plan on its head. That’s why your retirement strategy should include a backup plan, so if you have to retire early, you can still be financially comfortable.

Source: Retirement Readiness Survey 2017, Aegon Center for Longevity and Retirement

How will you spend your time in retirement?

Within the space of a generation, the way we view retirement has changed drastically. People increasingly see retirement as a lively stage of life – a time to try new things, visit new places and achieve long-held ambitions. So, while garden centres, golf and grandchildren may still be prominent features of any good retirement, they are now just as likely to be accompanied by flying, flamenco or foreign languages.

Average retirement age for men

Average retirement age for women

10% of over 65s are currently working

25% are expected to work full time past 65

65.1 years

63.6 years

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Create a list of your most important retirement goals, including when you would like to retire and how you would like to spend your time. This will help you and your financial planner formulate a plan to achieve those goals.

Common retirement goals

In our experience, the most popular priorities in retirement include:

• Travelling around the world

• Taking more regular holidays

• Visiting friends and socialising more

• Having more time to spend with family

• Helping out with childcare for grandchildren

• Taking up a new hobby, such as painting or dancing

• Being more physically active/getting fit

• Learning a new language

• Volunteering in the local community

Any good retirement plan must take account of your retirement goals, whatever they may be. If you don’t start with your goals, there is a danger that your retirement plan may not deliver the kind of retirement you really want.

How much money will you need?

In our experience, many people drastically underestimate how much they will need to

live on, while overestimating how much their pension pot will pay each year. To create a

realistic retirement plan, you will need a good handle on how much you are likely to spend

once you stop working.

Source: A Minimum Income Standard for the UK, Joseph Rowntree Foundation 2018

How far does the state pension go?

Minimum pensioner

household income required (2018)

Full state pension per week for a

couple

Left to spend

£350

£300

£250

£200

£150

£100

£50

0

£301.92£330

£28.08

For peace of mind, you may want to purchase an annuity scheme, to give you a guaranteed income that covers your basic living expenses each month. There is more on annuities coming up on page 12.

Basic living expenses

No doubt some of your everyday expenditure will change or decrease when you retire. For example, it is likely you will have paid off your mortgage, you won’t have to pay to commute to work, and you will no longer be raising children. And if you buy a sandwich and coffee every day at work, that’s another expense you can cross off your list. However, you will still have plenty of everyday living expenses to account for.

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Therefore, a realistic retirement plan will factor in regular discretionary spending associated with your retirement goals. This might include:

• Holidays

• Shorter breaks and excursions

• Parties and entertaining

• Eating out

• Hobbies

• Paying into a regular savings account for grandchildren

Factor in ‘big ticket’ spending

Depending on your circumstances and goals, you may also need to factor in big-ticket, lump-sum expenses, such as:

• Paying off your mortgage

• Travelling around the world or taking a once-in-a-lifetime trip

• Buying a new car every five years or so

• Funding or contributing to a child’s wedding

While all these costs may be considered non-essential, they are still crucial in terms of creating and maintaining the lifestyle you want in retirement. So, if you dream of having a huge party or going on a Caribbean cruise to celebrate your 40th wedding anniversary, a good retirement plan will ensure you have the means to make that dream come true.

of people aged 55 or over don’t know how much money they will need to live comfortably when they retire.

31.7%

Source: UK Retirement Readiness Survey 2013, Aegon

Retirees actually need around

£39,000 per yeartaking into account more expensive luxuries, like a new car every five years and long-haul holidays.

Travelling accounted for

£4,500 per yearwhich is a notable chunk of retiree’s annual spend.

The average UK wage is

£29,000 per yearindicating that the ‘rule of thumb’ of needing between half and two-thirds of your income during retirement may be outdated. For many, half their current salary would simply not stretch far enough in retirement.

Households spend just under

£2,200 per month(approximately £26,000 a year), to cover all the basic living expenses and some of life’s little luxuries, like a European holiday and eating out.

Retirement spending

Source: https://www.which.co.uk/money/pensions-and-retirement/starting-to-plan-your-retirement/how-much-will-you-need-to-retire-atu0z9k0lw3p

What is a good rule of thumb?

The common rule of thumb is that you will need between half and two-thirds of your net income to maintain your current lifestyle in retirement. But is that really enough in practice? To find out, Which? undertook a survey of retirees to discover how they really spent their money. The results make for interesting reading.

of people admit they do not know what level of income they will receive when they retire.

56.2%

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Look at expenditure in later retirement

With average life expectancies increasing, your pension pot may well have to cover two or three decades of expenses – and as you move through retirement, your priorities and your expenditure will change.

For example, it is likely you will spend more on leisure in the earlier retirement years, but this spending may reduce as you get older. On the other hand, you may find you spend more on utility bills and insurance, or you may have to fund your own care in later life.

Consider long-term care

Your retirement plan therefore needs to consider how your expenditure might evolve over the years. Of course, there are many uncertainties around expenditure in later retirement. You might need full-time, long-term care. You might need to fund the entire cost of care yourself. You might qualify for certain state benefits to help cover the costs. Or you might not need any care in later life.

At Ascot Lloyd, we work with clients in their 50s and 60s to model various future scenarios, which provides some much-needed clarity and confidence for retirement planning.

Are you prepared for those ‘what if’ scenarios?

Cash flow modelling is a valuable tool used in retirement planning. It enables you to visually see the impact that your forecasted income and expenditure will have on your ability to make your pension pot last and helps you to compare different ‘what if’ scenarios.

Ask your adviser for more information.

Specialists in later life planning

We have a number of advisers who are certified by the Society of Later Life Advisers, meaning our team is trained to give advice to people who require care, and guide their families through the process.

Source: Aegon UK Readiness Report 2017

There are plenty of pension options out there, so if you find that your current pension arrangements are not enough, you have the power to steer your pension strategy in a different direction so that you can achieve the right retirement income.

Retirement income

Once you know how much income you will need in retirement, you can then work out

whether your current pension arrangements are going to deliver the income you need.

State pension income

Whether you qualify for the state pension, and how much you will receive, will depend on your National Insurance record. You will need 10 qualifying years of National Insurance contributions or credits to get any form of state pension, and 30 or 35 qualifying years for the full state pension, depending on when you started working.

A good first step is to get a state pension forecast, as this will tell you how much you can expect from your state pension and when you can access it. Head to www.gov.uk/check-state-pension to get your personal state pension forecast.

However, while the state pension is a good starting point, you should never assume it will be enough to live on in retirement. For the vast majority of people, additional income is needed to cover basic living expenses, let alone life’s little luxuries. Typically, this additional income will be achieved through a private pension.

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Evaluate any existing private pensions

Contributing to a private pension is one of the most effective and tax-efficient ways to fund your retirement. The amount people have saved into private pensions is increasing. The government’s auto-enrolment scheme has done a lot to boost pension contributions – yet, the average UK pension pot is still only around £35,000. For most, this simply is not enough to fund the retirement they have in mind.

If you have any type of company or personal pension, now is the time to get an up-to date valuation of your pension scheme (or schemes) and assess how much that pot will realistically deliver when you retire.

If you are already contributing to a pension, the most important thing is to keep contributing, and take advantage of any arrangements where your employer will match your contributions. You should also consider increasing your contributions as you get closer to retirement – providing you seek advice on the tax implications of making extra contributions.

And if you do not have a private pension in place, it is not too late to start saving for your retirement.

Track down your old pension policies

Most of us will have several jobs throughout our working lives, so you may have old pension policies from previous jobs gathering dust somewhere. Head to www.findpensioncontacts.service.gov.uk to be reunited with any pensions you may have forgotten about. If you do have multiple pensions, it may be easier to bring them all together under one scheme. Talk to a financial adviser about whether this is a good move for you.

Boost your retirement savings – what level of risk is appropriate for you?

If you are only just starting to save seriously for retirement, or looking at ways to boost your retirement savings, issues around risk and affordability will inform your investment decisions. In other words, can you afford to take investment risks, or are you looking for a stable, secure income in retirement?

The best route for you will depend on your attitude to risk, your goals, and your personal financial circumstances, but a financial adviser will help you weigh up your options and determine the right way forward.

Retirement income options

Flexible income (drawdown) Guaranteed income (annuity)

How much can I take as a tax free lump sum?

Up to 25% of your pension Up to 25% of pension

How and when do I receive income?

You have flexibility on when and how much you receive; you could drawdown more in early retirement and less in later retirement

You have a fixed income for life

What happens to my remaining pension pot?

The rest of your pot remains invested while you are drawing from it, which means the value of your pension pot can rise or fall

The income is guaranteed for life

What is the key risk?

If the value of your pot falls significantly, you could run out of money

Income is based on interest rates; if interest rates are low, you may not earn very much income

Passing on your pension

Any funds you do not withdraw can be passed on to loved ones

Options for passing on unused funds are more limited

£5,000 savings rate band

25%tax-free cash

from a pension

£5,000 dividend allowance

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Tax efficient income in retirement

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Take action

Work with a financial adviser to get a full picture of your retirement income – including state pension, private pensions and other savings/investments – and assess whether this is enough to meet your retirement goals.

When you have spare cash, and where it is tax-efficient to do so, you can inject extra savings into your pension pot in the run-up to retirement.

Your financial adviser will be able to advise you on how best to increase your retirement savings in line with your risk profile.

£1,000 savings rate band

£11,500 personal allowance

£45,000 of tax-free income

for a couple

Include other sources of retirement income

Pensions may be the most efficient way of saving for retirement, but they are not the only route. Additional sources of retirement income may include:

• Paid work beyond retirement age

• ISAs and other savings

• Rental properties and other investments

Your retirement plan should therefore factor in any additional income sources, over and above your pensions.

Understand your pension freedoms

In 2015, the government introduced ‘pension freedom’ measures, which are designed to give people greater choice over how they pay into and withdraw money from their pension pot.

These measures have made it easier for people to access their pensions earlier and in more flexible amounts. However, if you do decide to withdraw funds from your pension, it is important to do so in the most tax-efficient way possible.

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Current status

Sarah James

Employment status

Employed full time with generous company pension scheme

Self employed

Pensions Contributes the maximum in to her pension each month. Her current pension fund is £500,000

Has no pension

Savings No additional savings Share portfolio worth £500,000 that was inherited from his late father

State pension Will receive state pension Will receive state pension

James and Sarah are both in their mid 40s.

They would like a joint income of £60,000

per year in retirement. Sarah is employed with

a large multinational organisation whilst James

runs his own carpentry company.

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Current tax implications

• A basic state pension will use up most of the tax-free personal allowance.

• Sarah can draw 25% of her pension tax-free.

• Any income drawn from Sarah’s pension will then be taxed at 20%, or 40% above the higher rate band (currently £32,000).

• Any growth on the share portfolio held by James above the annual capital gains tax limit (currently £11,100) will be taxable.

• Any dividends above £5,000 will be taxable.

Case study The solution

• James should save into a pension so that both Sarah and James draw income from their pensions paying 20% tax, rather than 40%.

• James and Sarah should start to utilise ISAs as well as pensions.

• The couple should look at whether the share portfolio could be held in joint names to use two sets of allowances.

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The family home

Aside from whether there is any residual mortgage to pay off, the biggest question around the family home is whether you will stay in the home after you retire, or sell up. In our experience, people tend to assume they will downsize in retirement and free up a large lump sum of equity to live on, but the reality is often quite different.

When it comes down to it, many retirees find the thought of leaving the family home distressing, and the realities of moving

to a smaller property, perhaps in an unfamiliar area, are not very appealing. Plus there is the fact that, depending on the area, a smaller property may not be all that affordable. This can leave some people in a difficult financial position – where they have been banking on a lump sum that, for one reason or another, does not materialise.

Your decision about the family home will influence most of your retirement planning decisions, including your income needs, so it is crucial you align your expectations with what is likely to happen in practice. If your long-held retirement dream is to sell up and move to the country, that’s great. But if your intention to sell is driven purely by financial motivations, you may want to reconsider your plans to avoid any last-minute surprises.

Tax implications

Just because you are no longer working, does not mean you stop paying tax. You will still have to pay tax on any pension income over and above your tax-free personal allowance, and how much tax you will pay will depend on your individual tax rate.

So that you can build up an accurate picture of your retirement income, it is important to anticipate how much tax you are likely to be paying after you retire. You may also benefit from certain tax-efficient strategies to reduce your overall tax liability in the run-up to retirement. Ascot Lloyd’s in-house tax advisers can help you assess the tax implications of your retirement plan.

Other considerations

While your personal goals, expenditure and income are the biggest considerations for retirement planning, there are other factors to take into account.

Life expectancy and health

We are all living longer. In fact, the United Nations Population Division estimates that one in five people can now expect to live beyond their 90th birthday. This means that those approaching retirement in the next 10 years could reasonably expect to be retired for 25 or even 30 years.

Living longer is a blessing. Many of us will live to see not just our grandchildren but our great-grandchildren, grow up. However, living longer presents some challenges for pensions. Our pension pots have to last longer, for one thing, and they may also need to fund potentially many years of later-life care. Plus, it is not uncommon for retirees to be funding their parents’ care. Thorough planning is needed to accommodate these costs.

Your overall health may also influence your attitude to risk, what type of pension product you choose, and how your pension is paid. For example, someone with an annuity (i.e. guaranteed income) policy who is in very poor health may receive a higher level of income for the final years of their life.

Research by the insurance company Prudential has found that one in four people approaching retirement will still be paying off a mortgage (or other debt) after they retire. So if you are likely to be making mortgage payments in retirement, you will need to factor this into your income requirements.

You can never know what is around the corner, but, with our help, you can prepare for a comfortable – and long – retirement.

Inheritance tax

If you have an inheritance tax liability, you will want to explore the best ways to mitigate this and reduce the amount of inheritance tax due. There are many strategies to help you maximise the wealth that you pass on to your loved ones, and these strategies should form part of your retirement planning.

Spouses and dependents

Naturally, your spouse’s retirement plan will influence your own planning process. You will want to review your goals together, and create a comprehensive picture of joint expenditure and pension income for both of you. At Ascot Lloyd, we regularly work with couples and families, and are well placed to help you create a joined-up pension plan.

You may also find yourself financially supporting dependents well into retirement, whether it is a parent in long-term care, or a grown-up child still living at home. Or, like many grandparents, you may find yourself the primary source of childcare for struggling working parents – which, again, may influence your overall goals. All of this should be taken into account in your retirement strategy.

One in five people in the UK admit

they don’t know how to review

their retirement plans*. Make

sure you are prepared.

Speak to one of our

advisers today.

Source: Aegon UK Readiness Report 2017

Helping you plan the retirement you deserve

At Ascot Lloyd, we are here to help you work through all of the considerations set out in this guide, and steer your pension strategy accordingly. Talk to one of our financial planners to get started.

T: 0345 475 7500 E: info@ascotlloyd.co.uk W: www.ascotlloyd.co.uk

Where to go from here

There is a lot to think about in the years leading up to retirement, and retirement planning

can seem overwhelmingly complex. But with expert guidance, you can prepare for

retirement with confidence.

Getting started By working through the following steps with an independent financial adviser, you can review where you are right now and create a realistic retirement plan.

Set your retirement goals

When do you hope to retire and how do you plan to spend your time during retirement?

1) 2) Think about your desired retirement income

What level of income do you need to meet your retirement goals?

3) Review your current pension savings

Are you on track to create the retirement income you want and, if not, is there a better pension option for you?

4) Plan for the future

Create an ongoing pension strategy that is in line with your personal circumstances, retirement goals and risk profile.

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With you every step of the way

We are one of the UK’s leading national firms of independent financial advisers, committed to providing a personal and professional service to both individual and corporate clients.

Since we began our journey in the 1930s, our focus has been to alleviate the burden of financial planning and put in place the foundations to build strong financial futures for our clients. We believe that knowing your financial future and plans are sorted means that you can really enjoy your life.

We also believe that to achieve this you need a great relationship, not just with your financial adviser, but with the whole company so no matter who you speak to at Ascot Lloyd, you get the same quality service and professionalism from people that you know and trust.

Both the issues and possible solutions detailed within are generic and this guide does not constitute investment advice for the purposes of the Financial Services and Markets

Act 2000. The value of your investment can fall as well as rise and you may not get back the full amount invested. This guide is based upon our understanding of the legislation

and tax rates at the time of writing. These are subject to change and the value of any reliefs will depend upon the individual circumstances of the investor.

In need of legal advice?

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you to one of our highly qualified

professional connections who

will support you through the

formalities of a divorce.

Call 0345 475 7500

Visit www.ascotlloyd.co.uk

Email info@ascotlloyd.co.uk

Ascot Lloyd is a trading name of Capital Professional Limited, which is authorised and regulated by the Financial Conduct Authority. FCA Number 578614. Registered in England and Wales No. 07584487. Registered Office: Reading Bridge House, George Street, Reading, RG1 8LS.

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