At Lowes Financial Management, one of our key roles as Independent Financial Advisers is to help clients plan their finances for their retirement. We do this through effective investment and savings strategies, and our technical know-how around the complex tax landscape we have in the UK.
Our aim, over time, is to help our clients invest and save to accumulate a retirement pot of sufficient size (or more) to give them the lifestyle they want in retirement. But life is a moving feast and sometimes our best-laid plans go awry or we simply change our mind about when we want to retire. When this happens it can have a profound impact on our finances and so needs careful assessment, calculation and management.
So what is the financial cost if your plan of retiring at 65 changes to wishing to retire and access your pension at 60?
Pensions are a very tax efficient means to save for your future. A key benefit is that based on what you contribute, the government effectively tops up your pension by 25% or more, depending on your tax bracket. Over time, this money accumulates and can grow through compounding of investment returns. Often towards the end of our career, when we may be earning more money, we are able to contribute more into our pension.
Standard Life recently calculated the value a pension saver would miss out on by retiring five years earlier. According to the group’s figures, an individual who began working on a salary of £23,000 per year and paid the standard monthly auto-enrolment contributions (employer and employee contributions of 8%) from the age of 22, would build up a total retirement fund of £263,000 by the age of 65. However, if the individual retired five years earlier at the age of 60, this would result in a total pot of £203,000, a loss of £60,000. By contrast, if they chose to work up until the age of 68, they would see their pot increase to £304,000.
We can extrapolate this calculation to any size pot and any contribution level. But this simple calculation serves to illustrate the power of contributions and returns compounding over time. Lowes clients will have benefited from their years of advice to help enable them to retire at the time they want. Sometimes it is possible or we need to retire earlier than planned and Lowes Advisers can work through the calculations to show the financial effect of doing so.
A useful tool we use in such calculations is cashflow planning software. This allows us to map your various assets – pensions, investments, savings etc. – along a timeline to show how much income you are likely to have at any point in time during your retirement. Of course, none of us know how long we will live for, and we don’t want to run out of money, so we plan to a default date, usually 100 years. Cashflow planning is a snapshot of our finances at a certain point in time, so we do need to review this on a regular basis, particularly where there are changes such as inheritance or a need/desire to retire earlier than planned, being among them.
The value of pensions and the income they produce can fall as well as rise. You may get back less than you invested.
Our Financial Advisers are here to help and guide you through tougher times. If you have your sights set on retirement in the next year and you have concerns, please talk to us. Call us on 0191 281 8811 and we will arrange for a member of the team to contact you.
