Retirement planning tips for the employed and self-employed
When it comes to retirement planning generally the earlier you start the easier it is to get into good savings habits, little and often is a great way to begin to build a fund for retirement.
Types of solutions
There are a number of products that can be used and there are also different tax allowances that can be utilised to ensure that you get the most out of your savings. In the absence of any favourable interest rates, investing over the long term is another important consideration.
Many people like to consider property as an option, however many individuals are already homeowners and with a lack of liquidity and additional taxation in the form of stamp duty plus income tax on rental income, this can reduce the attractiveness of this. Diversification, not putting all of your eggs in one basket, is another point to consider.
When looking at the longer term, a stakeholder or personal pension is a useful tool as it will allow for regular contributions which can benefit from tax relief as well as the opportunity for tax free growth within the pension. However, a pension cannot be accessed until you reach pension age so it is important to balance immediate and long term needs and the use of an ISA, which is completely exempt from tax, is another important planning tool as you can withdraw funds at any time if required.
There are more complex pension arrangements such as SIPP’s which can also be used to build funds for retirement and can facilitate a wider range of sophisticated investment solutions.
Pension contributions
For personal pension contributions an individual can receive tax relief on contributions up to the lesser of the annual allowance (£40,000 for 2021/22), or their relevant earnings in the tax year. If a basic rate tax payer were to contribute £80 per month, they would receive relief of £20, making the total contribution £100, the effect of this relief combined with pound cost averaging helps to build a larger pot for the future. Higher and additional rate tax payers can obtain further relief via self-assessment tax return and single contributions could be made at the end of the tax year if earnings had resulted in loss of the personal allowance, which begins to taper away once earnings are in excess of £100,000.
For self-employed individuals it important to note that if you are making personal contributions, dividends are not included as pensionable earnings.
The alternative to personal pension contributions is employer contributions. Individuals running their own limited company have the option to make employer contributions into a pension scheme. These contributions do not benefit from tax relief in the same way as personal contributions; instead they can qualify to be deducted from profits before being assessed for corporation tax. To qualify, employer contributions must be wholly and exclusively for the purposes of the business This is another useful way of building retirement provision.
Other considerations
Aside from savings and investment, self-employed individuals could consider the importance of protection policies such as Income Protection and Critical Illness. If you are unable to work due to accident or injury an income protection policy could ensure that you continue to receive a percentage of your income, potentially until retirement age. A Critical Illness policy would provide a lump sum if you were to be diagnosed with a serious illness, this could then be used to provide some financial support before you can return to work. Limited Company Directors have the option of meeting the cost of this insurance through the business, which could then be deducted as a business expense.
A common scenario as you move through your career is accruing multiple pension pots, with a variety of providers, through various periods of employment. All of these pots add up, so it is important to review them to ensure they are suitable and this is great opportunity to take control of your arrangements and begin to plan ahead. As part of this exercise the use of a cashflow analysis will allow you to spot shortfalls in your retirement funding and discuss potential solutions for bridging the gap.
The use of a budget is also crucial as this will allow you to see what surplus funds are at your disposal, these can then be utilised to make use of the various tax allowances available, such as an ISA or pension contributions. A general investment account could also be used alongside these wrappers to make use of your capital gains tax allowance and to provide funds for future ISA investment.
It is never too late to take control of your retirement planning and the use of a financial planner could be useful to help establish a plan, understand your objectives and begin to take the necessary steps to achieve them.
The information given and opinions expressed are subject to change and should not be interpreted as investment advice. All data is sourced by IM Asset Management Limited unless otherwise stated. All financial and wealth management services are provided by IM Asset Management Limited which is regulated by the Financial Conduct Authority (FCA), FCA Firm Reference Number 402770.
This is where cash flow planning is beneficial. It shows people how much is enough for their retirement.”
