How building a retirement plan incorporating a variety of assets – from ISAs to property – gives you maximum flexibility in later life
The quick read
There’s been a lot of change to the retirement-planning landscape in recent years, but one thing remains the same. No matter how quickly the market evolves, pensions are still the single most important building block for long-term savings.
However, they don’t need to be the only such block. A good retirement plan will typically include a variety of different assets, with pensions at the core, but used alongside other forms of investment.
There are also circumstances where your focus will need to shift away from pensions and onto other ways of building up your retirement funds. For example, the lifetime allowance – the maximum amount of pension savings you can build up over your lifetime without facing a potential tax charge – is currently frozen at £1,073,100.
“Some people who thought it wouldn’t apply to them will see it on their radar and will have to think about other options,” says Tony Clark, Senior Propositions Manager at St. James’s Place. “Pensions are the main vehicle, but smart planning will also look at other assets that help you mitigate any potential lifetime-allowance charge.”
A holistic view
While pensions are the most tax-efficient way of saving for retirement, it also makes sense to have diversification in the assets you can call on when taking an income in later life.
“Having choice and flexibility in where you take your income from helps you plan what retirement will look like,” says Tony.
Whether you’re saving for a holiday, a first-home deposit or for retirement, there’s a good chance you have an ISA. It’s important to understand how pensions and ISAs can dovetail most effectively, especially when it comes to the tax implications.
“More people are using ISAs to save for retirement because of the flexibility they offer,” says Tony. “But ISAs don’t necessarily have the same tax efficiency as pensions, so it’s about being mindful of how you approach this and using ISAs in the most tax-efficient way that compliments your pension.”
While the money you pay into an ISA has been taxed beforehand, there’s no Income Tax due on the interest or dividends you receive. With pensions, however, subject to certain limits, there’s no tax when you pay in (because you get tax relief on your pension contributions at your marginal Income Tax rate), but Income Tax is charged on pension withdrawals above the 25% tax-free cash entitlement.
Spreading the net
Property is another popular source of retirement income and a good way of saving for the future. Again, it’s important to think carefully about how you take income from it.
“If it’s a second property and you’re receiving rental income, you need to manage the tenancy to mitigate any gaps,” explains Tony. “If it’s your own property, you might be thinking about downsizing in retirement, but that’s not easy either and it’s surprising how many people don’t go through with it when the time comes.”
“There are products that people can look at, but some may be well beyond the level of risk that you’re prepared to take, even if they do have appealing tax advantages,” cautions Tony.
Don’t forget the pension payouts you’ll get automatically, such as the State Pension and any Defined Benefit (DB, or final salary) pension entitlement you may have.
It can be easy to overlook these, but they should be factored into your thinking about where you take your pension income from. “Check your National Insurance contributions record and make sure it’s fully funded so that you maximise your State Pension when the time comes,” says Tony.
Making the pieces fit
Understanding the various investment vehicles, the possible tax implications and how they work as part of your wider financial plans is crucial. That’s why this is an area where financial advice is invaluable.
“Having diversification is great, but there needs to be an objective and an understanding of the order you’ll use the different vehicles in when it comes to taking income from them,” says Tony.
These days, most people planning for retirement will be using several different types of investments and income sources. While this means you have more choice and flexibility, you also have more responsibility for managing your money and knowing which assets to tap into.
“It’s a big task, but that’s what a financial adviser will help you with,” says Tony.
Get in touch with us today to find how you can build a holistic retirement plan tailored to your financial goals.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.