In my last blog I explored the arguments around having a financial plan and in particular looking at cash and how this may no longer be the right place to be.
The next aspect I want to consider is income in retirement, we read different arguments around whether we should opt for an annuity or take drawdown. I want to turn this on its head.
Three years ago a fund of £800,000 would provide a 65 year male with a pension of £50,000 a year this included a two thirds spouse’s pension and was guaranteed for five years. Now they would need a fund of nearly £1,000,000.
I won't go into drawdown but this has also had a massive dent because of changes in the rules and falling annuity rates.
The problem is that once again we are fixated on the solution and not the goals. Because people see this they say pensions are dead, and why would you invest in a pension for 40 years to find that you can’t get your money out. Of course there are some positive aspects to pensions but let’s ignore those for this blog.
This goes back to financial planning. When we draw up a plan we identify goals. I recently reviewed my financial plan after finding myself out of work twice in the last three years, and having to use most of our savings to survive we only have a small amount of savings. We have set up three goals – two are short term goals but I want to focus on the third, retirement planning.
In drawing up the plan I considered what we could live on in retirement, this looked at our current budget and what elements would not be there when we retire – so for example the mortgage, life assurance etc.
We then looked at what we had, so we will have a state pension (hopefully), some guaranteed pensions and some personal pensions. We have estimated that all of this will give us a comfortable foundation stone in retirement. However, this is short of what we need. The next step was to consider the most tax efficient way to receive the remaining income. In our case we have opted to save into an ISA because the fund is tax efficient and the income is tax free. We except that the downside is that we don’t get tax relief on contributions and that it will form part of estate but it fits with our plans.
Turning to investments we have taken a more adventurous approach to investing, looking to invest across a number of sectors and geographical regions. We also hold a small number of shares.
And finally we monitor the plan quarterly and fully review on an annual basis. The point of financial planning is this, if we focus (as the headlines do) on the end solution then we can lose sight of the goals. If we focus on the goals then we can tweak the end solution to ensure it continues to deliver.
Disclaimer: This is just an example, other solutions may be appropriate depending on an individuals circumstances.