Retirement Planning

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As an independent financial adviser (IFA), you have been approached by your manager, to write a document to be given to trainee financial advisers following a training day. The subject of the training day is the provision of financial advice to individuals and families on how to save and invest to fund their retirement.
Your manager has requested that you discuss the different types of strategies that could be used by clients to fund their retirement. Full details of each suggested strategy should be provided, along with the benefits and drawbacks of each strategy. Commentary should also be provided relating to the suitability of the different strategies to different client circumstances.

There are numerous financial transitions that we all go through during our lifetime. From earning a living, saving and investing, to when we reach retirement and withdraw our saved assets. One of the most vital financial transitions is the retirement aspect, and dependant on how you invested, can transform your retirement experience entirely.
It has been stated ‘According to the Office for National Statistics, a child born today in the UK has a 1 in 3 chance of living to 100’ – https://www.moneymarketing.co.uk/retirement-planning-in-the-age-of-longevity/ and as longevity expectations increase, the possibility to plan for a retirement of around 30 years is to be expected, therefore adequate provisions should be in place to fund a comfortable lifestyle after work.

Retirement Planning

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The past has changed significantly, and people now want to travel and have experiences that were somewhat rare. As mentioned in REFERENCE PG265 TOPIC 7 ‘Those planning for retirement should be encouraged to take a realistic view of their needs and then a realistic approach to funding them.’
We will discuss the strategies available and how we can implement them in real life scenarios.

WHAT STRATEGIES ARE THERE?
There are several strategies that can be used to fund a retirement, each with their own benefits and drawbacks which are explained in more detail below. The case studies will demonstrate their implementation.
PENSIONS
Pensions are a form of investment that are designed to provide an income to live on when you retire. There are numerous types of pensions, all offering different benefits. A few explained below.
Self-Invested Personal Pension (SIPP)
A Self Invested Personal Pension (SIPP) is a type of personal pension that gives you the liberty to manage your own investment decisions. It allows you to make choices from a wider range of investments which are not usually offered by pension providers. The contributions you make to a SIPP will obtain tax relief, however, up to certain limits.
The wider investment controls may allow you to invest in a range of assets that include UK and overseas stocks and shares, collective investments (ie OEIC’s & unit trusts), investment trusts, property and land (however not including most residential property) insurance bonds.

Retirement Planning

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SIPP’s are flexible, and one of the benefits of them are that if you change jobs, or decide to stop working, you can choose to continue contributing to the plan. If you begin working for a new employer, they can also decide to make contributions to it.
The ability to invest in a wide variety of assets also means the money can be withdrawn in several ways. However, this freedom may also be a disadvantage for those who are not confident in managing their money.
SIPP’s may seem like a practical choice for someone who is self-employed, but maybe not for someone who could be missing out on valuable contributions their employer provides.
Workplace Pension
A Workplace Pension is a scheme that is set up by the employer in order to provide retirement benefits for the duration you are employed by them. It allows you to accumulate a pension fund during your working life. Most employees are now automatically registered into a workplace pension, unless they opted out of it. They would then be re-enrolled every 3 years. The employer and the employee pay money into the pension that is then topped up by tax relief on the employee’s contribution.

Stakeholder Pension
‘This is a type of defined contribution pension, which has a retirement value based on the amount you pay in and how your investments perform over time.’- https://www.pensionbee.com/pensions-explained/pension-types/what-is-a-stakeholder-pension. This pension is between the individual and their pension provider, and there are strict government conditions that have to be adhered to. These pensions are available for employees in permanent work, unemployed or self-employed individuals.
These types of pensions involve low and flexible minimum contributions, capped charges and a default investment strategy if you don’t want too much choice. This type of investment is offered by employers, but as an individual, you can start one yourself.

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ISA’s
An alternate option for investing into your retirement is to open an ISA. ISA’s offer a tax-free way to save, and you are able to invest up to £20,000 in the current 2018/19 tax year.
There are several different types of ISA’s, each with their own benefits and drawbacks.
Cash ISA
These are available to any individual over 16 and resident in the UK for tax purposes. Cash ISA’s include unit trusts and OEIC’s, which provide REF PAGE 255 BOOK ‘near certainty’ that you will receive no less than 95% at any time during the first 5 years of your original investment. Another benefit of this investment is that any interest paid on the account, is tax free, and the money can be withdrawn at anytime.
Cash ISA’s are beneficial for emergency funds and temporary savings, to supplement your day to day retirement income. These types of investments are not ideal for longer term planning, as the amount does not grow in value.

Stocks & Shares ISA
If you are looking to generate wealth over a long term, a stocks & shares ISA is an excellent way to do this. The main advantage of Stocks & Shares ISAs is that they allow you to invest in a variety of assets such as mutual funds, shares and exchange-traded funds (ETFs).
Furthermore, this investment is a tax-free product, which means that any interest or capital gains generated, are protected from taxes.
Stocks & Shares ISA’s are flexible, as your money is not locked away for the long term and can be withdrawn whenever you want to. This may however impact your ISA allowance for the year.

Retirement Planning

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Lifetime ISA
Individuals aged 18 or over but under 40 are encouraged to open a Lifetime ISA . You can invest up to £4,000 each year, until the age of 50 and the government adds a 25% bonus to your savings, of up to a maximum of £1,000 per year. Therefore if you save £1,000 in your LISA, you’ll have £1,250 and if you save the maximum of £4,000, you’ll have £5,000, and that is before interest or growth.
If for example you are self-employed, and therefore don’t get the benefit of a workplace pension contribution, but you also want to supplement your retirement, then a lifetime ISA could be the best option.
You can take out all of your cash from the LISA before you turn 60, however there is usually a charge. It is therefore recommended that you try to utilise the LISA if you are certain that the cash is for one of the two defined purposes; a first-home purchase or for retirement.
Withdrawing from a LISA for other reasons will incur a 25% penalty. More details explained in the case study.

Retirement Planning

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CASE STUDY 1
Danyal is 41, and a self-employed director earning £30,000 for the past 6 years. He has no pensions in place and no other investments either. He wishes to retire by 65 and wants to achieve his own personal objective to go travelling with his 2 children.
Danyal has no savings to supplement his retirement comfortably. He has a small amount of debt he would also like to pay off in one go.
As Danyal has a personal objective to travel with his children, he would need to consider how much income is sufficient to live on, as well as how much to set aside for his luxuries. He isn’t sure what the most appropriate plan would be, to ensure he receives the maximum benefits once he retires. Upon profiling, Danyal states he has a medium attitude to risk.
The best financial strategy Danyal should adopt, will be a mix of pensions and ISA’s. Majority of ISAs offer instant access, which is most suitable when income fluctuates, and being self-employed, this will enable Danyal to dip into funds if need be.

The reason why pensions are a vital part of the strategy, is because when you take out a pension as a self-employed person, the government gives tax relief on the contributions that match how much income tax is paid. For example, if Danyal is a basic-rate tax payer, £100 of his contribution will give an £80 net pay.

Retirement Planning

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SIPP

The SIPP will allow Danyal to decide how much he would like to invest and when he wants to invest. Danyal is only 41, therefore the earlier he starts to invest, the more time he has to enjoy tax relief, and grow his investment.
A disadvantage of having a SIPP is that Danyal won’t normally have the ability to withdraw the funds until he reaches 55, however in this situation, this conveniently is earlier than the age he would like to retire anyway. He will also be able to continue making contributions until he is 75.
Should Danyal pass on before he reaches 75, in most cases, his SIPP can be passed on to his beneficiary without incurring any tax penalties. Therefore his 2 children will be able to withdraw the funds if they wish. This can be as a lump sum, take a regular income or withdraw the amount in its entirety. https://moneycheck.com/sipp-guide/

LISA
The Lifetime ISA is an option available to self-employed workers, however it is not an alternate to having a pension. There is an option to withdraw the cash before the age of 60, which is beneficial for those that want easy access to their funds. The downfall of this particular ISA as explained earlier, is that unless the money is being used for a first home purchase, or if it is being withdrawn after the individual is 60, then there is a 25% charge on the amount that is to be withdrawn. This then wipes out the Government’s contribution and would mean Danyal would get back less than what he invested.
For example- If Danyal saves £1,000 by April 2019, therefore qualifies for a £250 bonus (due in May), he will have a total of £1,250 (without interest). If he decided to withdraw the amount shortly after, and subsequently closed the account, the 25% penalty would be £312.50.  £1250- £312.50= £937.50.
This specific ISA would be beneficial as a top-up to the retirement savings pot, rather than an alternate method.
Danyal will also be entitled to the state pension, providing he makes the requisite national insurance contributions. He would require 35 years’ worth of these contributions to receive the new state pension of £168.60 every week. This equates to £8767 a year.

Retirement Planning

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Case study 2
Aaliyah, aged 27, has worked for MagnumEX Ltd for 4 years. She is employed as a web developer and receives a gross annual income of £28,000. She is currently living with her parents, but wishes to move in with her boyfriend Matt, who is a team leader at a call centre.
Aaliyah was automatically enrolled in her company’s pension scheme since she started working for them, as she didn’t realise she had the option to opt out. Aaliyah didn’t know why she was enrolled in this scheme, and what the benefits were, and even considered to opt out, however wants to consider all the options available to her including any investments through savings.  At present, Aaliyah and her employer both contribute 5% of her basic salary. Matt would also like to consider a pension plan, as he would like to contribute to their retirement fund so they can both live comfortably without relying solely on Aaliyah’s investments. Aaliyah and Matt have both mentioned that they have a medium attitude to risk.

Retirement Planning

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By admin in Essays on April 26, 2019