How to maximise retirement savings through investment planning

When it comes to retirement planning, the sooner you start the better. Whether you’re close to retirement or have many years to go before you stop work, there are plenty of things you can do to boost your retirement income.

Retirement planning should be based on your aims, objectives, and the level of risk you are prepared to take. Here at PMW, we use methods like cash flow forecasting to work out what a client can afford to do, help them put in place a suitable and achievable plan, and project forward to see what it is going to potentially look like in the future.

Pay into a pension

A pension is a cost-effective vehicle to use to save for retirement given the tax benefits associated with making contributions. This should be your prime investment when it comes to retirement planning as it is so tax efficient. UK companies are now required to provide all qualifying individuals with a pension plan into which both employers and employees make varying levels of contributions, usually scheme specific.  Due to the tax benefits that come with making contributions, it makes sense to pay in as much as you can afford, remembering that you’re locking your money away for potentially decades, which can seem like an eternity if you’re in your 20s. Making pension contributions will need to be balanced with other investments which are accessible at all times to cover unexpected circumstances, and understanding the balance is where a financial adviser can add value to your situation. Talking your situation through with an adviser will also help you rationalise planning for something that is potentially such a long way off. Trying to imagine retirement when you may need your money for more pressing things such as buying a property, a car, a wedding, etc. can be a real challenge.

Generally speaking, the sooner you start the better and you can always begin with very small amounts. There are always other things people want to spend their pension money on, but it’s worth thinking about the long-term gain as you’ll be pleased you put the money aside in later years. After all, the power of compounding growth can turn a small amount into a large amount given enough time.

As mentioned, if you’re employed, your employer must ensure you have a workplace pension in line with auto-enrolment requirements and will pay a percentage of your salary as a contribution. You will also be required to make a personal contribution. It’s a tax-efficient way of putting money aside as pension payments are eligible for income tax relief at your highest marginal rate. Every £1 a basic rate taxpayer puts into their pension, costs just 80p whereas it costs 60p for a high rate taxpayer.

We used to be constrained by various limits on what individuals could put into their pensions without penalty – the annual and lifetime allowance for pensions. The annual allowance rose from £40,000 to £60,000 in 2023 and the lifetime allowance will be removed from the 2024/25 tax year onwards. However,  tax relief will still be restricted to 100% of your annual net relevant earnings, so if your employed income is £40,000 a year for example, you can’t pay any more than £40,000 into your pension and receive tax relief on the way in.

You can also use what is known as your carry forward allowance, which allows you to look back up to three years previously to the current tax year and make up any unused contributions in the current tax year, assuming you have already maximised this tax year. Note, that you would still require net relevant earnings in the current tax year at a level to support any additional contributions.

Levels of risk

 Pension plans are generally invested in a variety of financial markets to achieve long-term value creation. Planning your retirement may require you to consider the level of risk you are comfortable with. High-risk investments can lead to higher long-term returns, but equally, they could experience considerably more volatility, so it is a risk versus return consideration. You can always choose a blend of approaches to spread the risk.

If you are a long way from retirement, you may feel it’s worth taking on some higher-risk investments, whereas, when you are closer to retiring and accessing your benefits, it might suit you to move money into lower-risk more defensive less volatile funds, so that you can be more confident (as much as you can with investments) of generating the level of income you desire.  As with any investment, it is always important to remember that past performance is no guide to future performance.

Company pension schemes will generally have a default option for investment if you are not confident in self-selecting your own funds and risk profile. Sitting down and discussing your options with a financial adviser also makes sense to make sure you are making decisions suitable for your circumstances.

ISA allowances

 Making use of other allowances alongside funding your pensions should also be a consideration for retirement planning. The ISA allowance in the UK is £20,000 per person for the 2023/24 tax year. If you can fund the maximum every year and invest sensibly, you could be left with a sizable pot to potentially provide additional income, and the gains you make are tax-free. You can hold investments within an ISA in the same way you can with an investment account or pension plan, and most providers offer a huge range of investment options. Again, sitting down with an adviser to run through your aims and objectives, timeframes for investment, risk, and capacity for loss, will allow you to settle on something suitable for your circumstances.

Choosing the right provider is also an important consideration, to give access to the fund range and functionality you may need.

Choosing a pension

 Pension providers will differ slightly and offer different levels of functionality, charges, etc, and run in different ways. For that reason, it pays to do your research and find one that suits your requirements. A good financial adviser will talk through your needs and suggest a provider that would be a good fit.

Investment risk comes from what you do with the money once it’s in the pension wrapper. As mentioned, most company pensions offer a default option which is selected automatically for a member joining a pension scheme, unless the member specifies an alternative. The default option is intended to meet the needs of a wide range of pension investors – people of different ages, backgrounds, and income levels, but there is no guarantee that they will be suitable for your particular retirement goals. However, if you would rather not choose your own funds, a default investment gives you the reassurance of knowing that it has been selected by pension experts to fulfill a wide range of needs.

A lot of schemes offer a Lifestyling investment strategy based on your selected retirement age at the outset. Generally speaking, the younger you are, the longer your timeframe for investment, and potentially the more capacity you have to take risks, but as you draw closer to retirement age, it makes sense to move across to less risky investments.  With many pensions, this is an automatic process known as Lifestyling.

Your pensions should be tailored to the level of risk that you’re comfortable with and your timeframe for investment. Your choices should be monitored and reviewed at regular intervals – annually would be a suitable timeframe to consider. Giving your funds time to perform is sensible, so you should avoid chopping and changing investments if you can. If you pick your funds well at outset and continue to monitor them, they should deliver over time.

It is important to consider older pension schemes carefully as they could come with really valuable underlying benefits, such as guaranteed growth rates for example. Depending on the level of the guarantee,   it could be best to leave these alone until they mature. Again, a good financial adviser will be able to analyse existing schemes and make recommendations suitable to help you achieve your goals.

Combining pension pots

 Most people have more than one job over the course of a lifetime and these may come with different workplace pensions. They may also have their own personal arrangements and it could be worth combining them into one larger pot for a number of reasons, such as making it easier to keep track of your money. This course of action won’t be suitable for everyone or every scheme, especially schemes with valuable underlying benefits, or some final salary schemes, but a financial adviser will be able to provide guidance on this.

Pension pots and inheritance tax

 Not everyone uses their pension pots for retirement income given pensions currently sit outside of the estate for inheritance tax purposes and pass via a pension scheme nomination form and trustee consent. This is only relevant for unit-linked money purchase schemes as final salary schemes work in a different manner.

By the time you reach retirement age, you will hopefully have paid off your mortgage and have equity in your main residence. Once your dependents have moved out, you could downsize and use the surplus funds to generate the income needed to fund your retirement. The benefit here is that you would be consuming assets that could attract an inheritance tax charge in the future as opposed to consuming pension funds that sit outside of your estate.

Upon your death, the remaining pension funds can be passed to your spouse or left to another person outside of your estate. The funds may be taxable in their hands depending on when you pass away.

A key point here is to make sure your pension nomination forms are all up to date and relevant to guide your pension scheme trustees on what you would like to happen to your funds should anything happen to you. Failure to do this will mean your funds will pass via trustee consent and could end up in the hands of an unintended beneficiary.

Individual circumstances will change over time as will your options, so it is important to regularly review your affairs.

Holiday lets

 It’s worth mentioning that if you have a property and you rent it out as a furnished holiday let, any income generated is classed as net relevant earnings, that is to say, you could plough the entire gross proceeds into your pension.

In summary…

 With life expectancy at an all-time high and likely to continue to rise, most of us can look forward to a long and healthy retirement, so it pays to think ahead and start planning as soon as you can. People come to us at PMW from all backgrounds, walks of life, and with varying financial circumstances. Some are at the start of their financial lifecycle while others are thinking about decumulation and passing their wealth down the generations. Whatever stage you are at, it’s never too late to seek advice and start planning your retirement.