Advance planning significantly increases your chances of guaranteeing your long-term financial security. If you are building your own business, it is essential to have a clear idea of how the venture is going to provide for your future financial security.
The state pension will not fund a comfortable retirement, and you cannot assume that selling your business (or downsizing your home) will look after you for the rest of your life. You need to get a clear picture of what your financial objectives are and how you will achieve them.
1. Consider possible retirement dates
Consider your possible retirement date
- You need to have an approximate date in mind to calculate how much you will have to save between now and your retirement to provide the standard of living you require.
- It's quite likely that you will already have a retirement date in mind.
- If you have significant debts, such as a mortgage, it is sensible to have paid these off before your planned retirement date. If you would still have significant debts, think about repaying them earlier or moving your target retirement date back.
Check when your state pension starts
- Your state pension will provide one important source of income in your retirement. You may target the date you are eligible for the state pension as your retirement date.
- Do not assume that you will automatically be entitled to a state pension at 60 or 65 as has historically been the case. The system is undergoing significant change which may affect you, depending on how close you are to retirement age.
- Women born before 6 April 1950 received their state pension at 60. The pension age for women has since risen, and reached 65 in November 2018.
- From December 2018 the pension age for both men and women continue to rise, reaching 66 in 2020 and 67 by 2028. Further increases are likely.
- You can check your state pension age online.
2. Set your target retirement income
Consider the level of income you require for a comfortable retirement
- Most people will not comfortably live on a state pension alone. State funding is only expected to provide a minimal amount required to live.
- The level of comfort you enjoy in retirement will largely be defined by your own financial provision.
- As a general rule of thumb, most people look to retain between a half and two-thirds of their pre-retirement income.
Analyse your desired expenditure
Develop an approximate budget covering your expected retirement expenditure, including:
- any remaining mortgage or rent;
- council tax;
- utilities (gas, electric, water, telephone);
- travel and holidays;
- any other planned expenses or financial commitments.
3. Assess your assets
Consider all your assets
List your assets, such as:
- existing savings and investments;
- any occupational pension schemes from previous employment.
Make realistic - or even pessimistic - assumptions
- Many people assume that the value in their property or the proceeds from the sale of the business they are about to set up will fund a comfortable retirement. While this is possible, it is by no means guaranteed.
- When the time comes to sell your business it will only be worth what someone else is willing to pay for it. This is often much less than your own valuation. Many businesses are not sold at all when proprietors retire; they are simply wound up.
- View your business as a means of continually generating cash to provide for your retirement, not as a lump sum in waiting.
- Downsizing at retirement may provide a surplus, but is unlikely to provide a big enough sum to purchase a large pension. Each £100,000 might only provide an annual income of £5,000 depending on age and other factors.
Work out what your savings and investments will contribute
- If you have savings and investments, roughly work out their cash value and then assess what this would convert to in terms of retirement income.
- You can treat them as a lump sum or use them to provide income through purchasing an annuity. Once again, be cautious in your valuations, especially if you are considering an annuity.
Check your state and private pension entitlements
- You need 30 qualifying years of National Insurance contributions (or credits) to get the full state pension.
- Work out what you can expect from state pensions, including any state second pensions you may be entitled to from previous employments.
- Get a state pension statement from the Future Pension Centre (0800 731 0175).
- Check on any occupational or personal pensions you have contributed to. Contact the scheme administrators for an up-to-date valuation.
- If you have lost contact with an occupational or personal pension scheme, use the Pension Tracing Service (0800 731 0193).
4. Put your plans into action
Work out how much additional income you ideally require
- Compare your pension and asset calculations against your target income.
- At this stage, it will still be a reasonably rough calculation. But it should give you an idea of how much more you will need on an annual, monthly or weekly basis to meet your income targets.
Consider all your options
- There are a variety of ways you can look to provide additional income in retirement.
- The most common is a personal pension. Making regular payments into a personal pension is one of the most tax-efficient ways of saving for retirement, with the Government making an additional payment into your fund of £20 for every £80 you contribute.
- You can use vehicles such as unit-linked investment funds, with-profits funds or ISAs. You will have to make some decisions about how much risk you wish to take. The greater the risk, the larger the potential return.
- You can consider more risky investments, such as property - but with extreme caution.
Find an adviser
- Everyone's circumstances are different, and at this stage you should consult an independent financial adviser (IFA). They can work through your specific circumstances in greater detail.
- You are not obliged to consult an IFA and you can make your own arrangements. However, it's wise to consult one as mistakes can be devastating for your retirement.
- IFAs typically charge fees for their services: for example, an hourly rate, a fixed fee, a percentage of the value of your assets or an annual retainer. IFAs are no longer able to receive commission on investment products such as pensions.
- Find an IFA through unbiased.co.uk. Check how they charge and choose one that suits you.
- The Personal Finance Society can put you in touch with independent financial planners as well as advisers 'tied' to specific financial services companies.
Explain your circumstances and priorities
Give details of:
- any pre-existing occupational pensions;
- the length of time before your intended retirement date;
- the status and prospects of your business;
- your savings, investments and other assets;
- how much risk you want to take.
Ask as many questions as you need
It is your money and your retirement at stake. Don't be afraid to ask any questions that concern you or where you don't fully understand something. In particular, ask:
- What are the most suitable investments for you?
- What are the charges for the products being recommended?
- How much of the investment will be swallowed up by charges?
- At what age can you start drawing a pension or income without any penalty?
- How much flexibility is there in varying contributions if trading is tough?
- What are the implications for any dependents and any inheritance you would like to leave?
5. Working towards retirement
Manage business and personal assets
- Carefully manage your business and personal assets as you approach retirement. In general terms, it is a good idea to reduce the level of personal risk as you get closer to your target retirement age.
- For example, it is probably not a good idea to remortgage your home to provide a loan to the business if retirement is near. Should you run into problems, you will have a very short time to bounce back or may need to delay your retirement.
Invest as early as you can
- The earlier you start making provision for your retirement, the harder your money will work for you and the better the return is likely to be.
- The more you delay, the larger your contributions will have to be in order to save enough to get the same level of retirement income.
Top up if you can
- If business is good, it is worth topping up your pension if you can.
- There is an annual investment allowance of £40,000. Higher contributions will not benefit from tax relief and you will be liable to tax on the excess.
- There is a lifetime allowance for the total amount of pension benefit you can draw without being subject to an extra tax charge. From April 2019, the limit is £1,055,000 (£1,030,000 for 2018/19).
Have regular reviews
- Keep a watching brief on all your investments and sit down with your adviser regularly.
- You may find ways to get better returns by regularly reviewing your position. It will also be easier to minimise the effects of any downturns in the market if you can plan for them in advance.
6. Avoid pitfalls
Don't lock yourself in unless you are sure
- Some long-term investments require you to pay a set amount over a long period. If you stop paying in, you can lose money.
- Try to get the best balance between flexibility when you and your business may need it and a high rate of return.
Be comfortable with your risk
- Let you heart guide you when making decisions related to risk. If you are very worried about losing money on a risky investment, it is probably not right for you. You may be better with a safer investment with a lower return.
Spread the risk
- If you can, use a mixture of financial vehicles, such as savings accounts, bonds and share-based investments. This evens out the risk, so if one fails to perform it will not ruin your plans.
Do not underestimate inflation
- You are looking at projected values that may look a lot now, but when it comes to the time you retire, those sums may not buy nearly as much as they do now.
- As you move towards retirement, try to build a more accurate picture of what the value of your investments will buy at the time you will use them.
Understand the worst-case scenario
- While tax-approved pension schemes are protected if you go bankrupt, it may be possible for 'excessive' contributions made in the run-up to bankruptcy to be clawed back.
- Find out more about saving for retirement from the Pensions Advisory Service (0800 011 3797).
- Get pensions and retirement advice from the Money Advice Service (0800 138 7777).
- Read government guidance on workplace and personal pensions.
- Check your state pension age online or get a pension statement from the Future Pension Centre (0800 731 0175).
- Trace an occupational or personal pension scheme using the Pension Tracing Service (0800 731 0193).
- Find an independent financial adviser through unbiased.co.uk.
- Find a financial planner through the Personal Finance Society.