There are benefits to planning for retirement if you’re a married couple or in a civil partnership as it comes with allowances and exemptions. However, it may also mean that you need to consider the other person’s perspective on money and create a joined-up retirement timeline.
The foundation of a successful retirement plan for a couple is to sit down, as early as possible and discuss sensible retirement objectives covering the type of retirement you would like which extends to the amount you feel you may need, your target retirement ages, and any known future costs. It sounds obvious but a survey by Wesleyan, found that 46% of married adults don’t have a retirement plan in place while a third had no idea how much income they’ll need when they give up work.
Sitting down with your other half to discuss retirement plans might prove tricky, especially if you have different attitudes to money – research found that there is tension between 36% of couples during meetings with financial planners, however, a good financial adviser will be able to sit down with both of you, discuss your aims and devise a plan that satisfies both partners.
Being married does open up opportunities for planning that would be worthwhile considering. In addition to retirement planning, there are also inheritance tax benefits. If you’re not married but live together in a house that is worth a considerable amount, there is every possibility that without planning, the property would need to be sold to settle any potential inheritance tax liabilities on the first death.
How much do you need to retire?
Research carried out by The Retirement Living Standards, revealed that the minimum a couple should allow for to cover a basic lifestyle is £16,700 per year, while you’d need £30,600 to £49,700 to enjoy a more comfortable retirement.
Planning for this sort of income when you retire is made more difficult if you have children to consider, as you may be supporting them through university or helping them to get onto the property ladder.
All these factors need to be considered. As a couple, you’ll need to work out an anticipated annual income that you’ll both be happy with, factor in costs such as university fees, etc, and consider the fact that you might need to pay for care at some point in the future, which can be extremely costly.
You also need to remember that your financial goals might change at certain points in your life, which is why it pays to regularly review your financial situation and pension plans with the help of a financial adviser.
According to research, 49% of couples who plan their retirement together, achieve a moderate income (£34,000+ for a couple) and this drops to 40% for those who plan individually.
Pension planning for couples
Pensions work on an individual basis with everyone having their own personal allowances, but couples can benefit from both parties’ tax allowances. For example, one individual may be limited in what they can pay into a pension but have surplus income to allow a contribution into the others pension, maximising tax relief. ISA allowances are individual as well, with a couple having access to two £20,000 amounts.
Taxable income and the sale of assets can also be optimised between spouses in order to make the most of allowances, exemptions, and lower marginal rates of tax. The personal allowance in the UK is £12,570, which means a married couple can earn £25,140 between them before paying income tax.
If one partner is in a higher rate tax bracket than the other, income-producing assets can potentially be transferred between the two in order to reduce their overall tax liability.
Protection
Planning for a retirement together doesn’t necessarily mean you’ll spend it together. Nobody can predict what will happen in 10, 20, or even 30 years, so it makes sense to plan for all eventualities and ensure that both parties are protected and adequately provided for. It may be that one person in the couple earns more than the other and provision should be made to ensure that both partners achieve the retirement they are hoping for.
Protecting each other against accidents and illness is also an important consideration and making sure you have the required legal paperwork to act on one another’s behalf is important. Lasting Powers of Attorney (LPAs) offer the ability to designate decision making to someone else for Finance and Property, and/or Health and Welfare. Having these in place in case they are needed represents sensible financial planning.
In addition to LPAs, ensuring Wills and pension Nomination forms are in place and up to date should also be high on the priority list, and regularly reviewing these alongside any change in personal circumstances should be part of any major decision making.
Staggering retirement
In some instances, it might make sense for one partner to retire before the other, or health issues may force such a decision. The later you draw on a pension, the higher the likely income the pension will provide given one of the factors annuities are based on is life expectancy/mortality rates.
A delay of just five years can have a huge impact on retirement income, especially if contributions continue to be made into a work pension scheme that is matched by their employer and has the benefit of tax relief.
When you plan your retirement with your spouse, work out your preferred timeline and an adviser will be able to help you understand whether it is achievable. If not, you may have to consider a delay to your retirement or settle on a more modest post-work lifestyle. Reviewing your planning and existing arrangements in advance will help avoid such a scenario coming as a shock.
Debt
It makes sense to enter retirement after paying off any debts, the most obvious example being any mortgages on the main residence. Most mortgages are based on income multiples which will likely be lower once an individual retires from an income-paying job, which may make any outstanding mortgages difficult to maintain, and even harder to roll over into new rates in the future if required.
Many couples downsize once children have grown up and left home, which could provide an additional sum of money towards retirement income generation. Credit card debt is potentially another financial obstacle for couples and as they usually come with a high interest rate, it’s best to pay them off before you retire.
Risk profiles
When investing in pensions, you’ll need to consider your risk profile, i.e. are you happy to make adventurous investments that could potentially result in higher returns but also higher levels of volatility, or are you someone who prefers a slow, steady return? Putting this another way, you’d need to decide where you sit between a lower-risk investment strategy, which gives you a higher degree of capital protection but may not offer the opportunity to make such big gains or a strategy where your capital is fully exposed to market risk and volatility.
Couples might find that they each have different ideas and approaches toward risk – one might be adventurous, while the other is more conservative in their approach. It is perfectly normal to have different opinions which can be easily accommodated by adopting different risk profiles for different objectives or pots of money. For example, funds can be ring-fenced for essential spending when capital preservation is a higher priority, whilst other funds can be invested for life events that are unlikely to occur for the long-term (10- 20 years) such as care needs. These pots can tolerate more volatility and therefore adopt a higher risk profile given the timeframe for investment.
An adviser will help you understand the concept of investment risk and your capacity for loss, which will allow you to settle on an approach to risk that helps you achieve your financial objectives without making you feel uncomfortable.
In summary…
Planning for retirement as part of a couple comes with a wealth of benefits, but there are pitfalls too. By having open and honest conversations and engaging a trusted and experienced financial adviser, you can work together to put a long-term roadmap in place to help overcome any bumps in the road and ensure that both of you can look forward to the retirement you hope for.