Retirement Planning

Retirement planning just means looking forward to the point in which you want to stop working. It is about understanding what you want to do, when you will do it, and how you will get there.  

A lot of people think about retirement planning from a purely financial perspective, but one of the most important parts is figuring out your values – what gives you purpose? Once you have recognised that, you can put a financial plan together to get there.  

We do this so that when you do come to retire, you can do so without the fear of running out of money.  

We think the best way to plan for retirement is to talk to a good financial planner who can ask the right questions, but this isn’t always straight forward.  

Some advisers may lead with questions about money but to create the best plan possible you should first think about how you want to live your life, what your values are, and how you want to be remembered. This is certainly the starting point for First Wealth. 

From there, planning for retirement is about working out what assets you require, and if they are sufficient, generating tax-efficient retirement income, and hopefully making sure there is enough money left for things like philanthropy and providing for your family. 

To put it simply, the sooner you get on top of this stuff the better. It’s like anything in life; the longer you have to prepare for it, the better the outcome will be because you can save more. 

Rather than approaching retirement planning with the old ostrich mentality (bury your head in the sand and hope for the best) because it frightens us, we need to think of retirement as something which helps you move away from conventional working. With a clear vision of retirement, you are more likely to engage with retirement planning. 

The first step is to get clarity; be very clear and honest about what you want. A good way to do that is to ask yourself ‘if this was a blank canvas, how would I want to live my life?’ Then plan that out step by step.  

The next thing to do is to get financially organised. Here you will look at your existing wealth, your pensions, and your savings, etc. and then create cashflow modelling to decipher what your retirement will look like. After this, you should have a tangible side by side of what you want and what you have.  

Once you have the side by side, you need to assess how you will get there. This could require several things. For instance, additional savings, investment concepts, or protection policies.   

This is a visualisation of your future self that you can either do yourself or with a good financial adviser who can act as your coach. 

There are benefits for you and there are benefits for your family: 

• Pensions are a hugely tax efficient way of saving – any funds that go into your pension will receive tax relief; you can take out 25% of your pension at the point of retirement as a tax-free amount; and pension funds grow in a tax-free manner (the pot then generates a taxable income. 

• If the worst were to happen and you died before using your pension funds, you could potentially pass that money on to your children and/or family.  

You don’t necessarily need a financial planner for your pension; the main thing is that you have one and it is funded properly. However, a good planner will be able to help you in different ways, they will:  

1. Make sure you are maximising your contributions to get your pot into the best shape possible by using all of the tax relief available to you.  
2. Make informed decisions about what is in your pension, making sure your money is invested in an appropriate way to give your fund the best opportunity to grow. 
3. Help with the complicated bits. Options around pensions can be complex, particularly for how you take your income (e.g., income drawdown, pension annuity, or a combination of the two). 
4. Make your pension part of a wider retirement solution. Here, your pension would become part of a wider plan which aims to increase your income in retirement. 

In short, you don’t need a planner, but they can be helpful to have when it comes to the complexities.  

To work out when you can afford to retire, you first need to decide what you are going to spend in retirement. Once you know the answer, you can find ‘your number’ (the number of assets you need to generate the requested sustainable income).  

So, to put it simply, you can afford to retire when you have hit your number.  

A good financial planner will work out what your number is, and find the quickest way to get to it.  

You need to work out how much income you will need. That will tell you your number. This number is representative of how much you need to put away each month, taking into consideration how many years you have left until retirement.  

The amount you should save for your retirement is therefore different for everybody as everyone has a different number.  

This is why starting retirement planning as early as possible makes it more realistic.  

You can spend what you like in retirement, but the key thing from a planning perspective is to make sure you don’t run out of money.  

You will get a guaranteed state pension, and you may be lucky enough to have a final salary pension; whatever your net income is, you know you can spend it knowing it will not run out.  

However, if you are drawing down from a pot, we would normally model at about a 3.5% yield. So, if you had a million pounds of investments generating about 3.5%, you could sustainably spend approximately £35,000 a year.  

To simplify it, the amount you can spend is directly proportionate to the amount you have managed to save.  

As an oversimplification, there are two main forms of drawing an income from your pension in retirement.  

The conventional way of doing it is to buy an annuity where you give your pension fund to a life insurance company that gives you a guaranteed income for the rest of your life. This is safe and guaranteed. But your pot is ‘gone’ (you can’t get back what you give to the life insurance company).  

The other main form is an income drawdown, where the pension fund remains invested. You take out an amount each month or each year in line with your requirements. The advantage of this is that the fund is still there so if you passed away, you could potentially pass them down to your loved ones. There is more risk, however, because the markets go up and down. You should calculate with a financial adviser what a sustainable withdrawal limit is – often calculated at a figure of about 3.5%.  

You can also combine these two forms of income. Here you would use some of your pot to buy an annuity, while the rest stays invested.  

This is determined by your working career, including the number of years you have paid full national insurance contributions.  

The full new State Pension is £221.20 per week as of November 2023. The maximum state pension is applied if you have thirty-five years of national insurance record. 

For anyone who doesn’t have full national insurance contributions, it is possible to buy additional years to account for any missed calculations. Find out more about this here.