At some point in the future, most of us want to slow down and stop working, but still be able to maintain a relatively good standard of living while crucially not having to cut spending too drastically.
During our working lives, we have earned income from employment or self-employment to save and pay for food, housing, children’s education and long holidays etc.
When our earned income stops, however, there is a clear need for continued income from somewhere. This will normally involve using the income and capital sums earned during our working lives to save a sufficient body of capital on which we can then draw upon to fund what should be the longest and best holiday of our lives!
All being well, we should all have the new flat rate basic state pension of around £7,400 per annum, but this is far less than most people actually want or even need to survive, let alone provide for a comfortable retirement.
For those people lucky enough to have a generous company pension scheme, a large part of their required retirement income could be generated in this way.
For most people, however, the bulk of the money they will have to spend when they choose to stop working will come from their private savings.
Whether using ISAs, Investment Bonds, a Property Portfolio, Unit Trusts, OEICS, Cash Accounts or indeed Pension contracts such as SIPPS, the onus is now on the individual to accumulate a large savings pot with which to generate or convert to income.
Modern personal pension plans are simply very useful and crucially, tax-incentivised structures that can be used to save up money far more quickly that non-incentivised structures due to the extra inputs from HMRC.
Pensions remain one of the most efficient but at the same time most complex ways to save. You no longer have to save in old insurance company schemes with potentially high charges and poor choice – you now have far more flexibility to use the ‘pension rules’ to your advantage. We can now use a ‘pension wrapper’ to hold a portfolio of investments which is then sheltered from tax allowing these funds to grow extremely efficiently.
Regardless of the medium used to accumulate the savings, careful planning to ensure that you are saving enough on a monthly or annual basis is critical. Regular reviews to assess investment returns, inflation, charges, annuity rates and volatility are paramount to keep the target retirement income on track.