Nearing retirement (50s-60s)
You may still be a while from retirement, but it is important to keep regular tabs on your pension. Are you paying enough in to retire when you want to at your desired level of income, for example? Answering questions such as this will always involve certain assumptions, so it may be worth putting more money into your pension in case future growth levels turn out to be weaker than expected.
A pension forecast from your company, pension provider, wealth manager or independent financial adviser will give you a good idea of how much your fund will be worth by the time of your chosen retirement date. But this forecast will be based on specific assumptions about the growth level of your investments as well as how much money you contribute to your pension in future years.
For higher-rate taxpayers in particular, increasing levels of monthly pension saving – or even adding a lump sum from time to time – can be especially attractive due to the tax relief available. Given the fact that money in a pension can be accessed from the age of 55, maximising your contributions in your fifties can be a very tax-efficient way to save – and you won’t have to worry about your money being locked up for several decades.
Getting your risk level right is another challenge. Until the law was changed in April 2015, most people had to use their pensions at retirement to buy an annuity, and this effectively meant cashing the fund in.
As a result, one of the most common pension investment strategies was known as lifestyling: this meant gradually reducing the risk in a portfolio in the years leading up to retirement, typically by switching out of high-risk assets such as shares and investment funds and into lower-risk alternatives like government and corporate bonds or cash. The aim was to ensure that the fund suffered no sudden losses in value just before the purchase of an annuity. Since April 2015, however, it has become much easier to leave pensions invested in the markets after retirement while using them to generate a regular income through monthly withdrawals – this is a process called drawdown.
Many people now believe that this lifestyle approach is no longer needed, as their pension(s) can continue taking a reasonable amount of risk on the basis that the money will continue to be invested for many years during retirement, giving it the opportunity to ride out any short-term falls in value. As people live longer, there is also the fact that this pot may need to continue growing in order to ensure retirees can continue to generate an income throughout their twilight years.
If you plan to use a chunk of your fund to buy an annuity, either at retirement or shortly afterwards, it could be worth “de-risking” part of your fund for the reasons set out above. But the most suitable approach will vary from person to person, so it is worth getting expert advice based on your own circumstances.
Your state pension to forecast
The money you get from your state pension can have a significant impact on your finances in retirement. Under the new system (introduced in April 2016), the full entitlement is now worth £168.60 a week or around £8,750 a year – but you could be due more or less than this, depending on factors such as whether you have been contracted into the state second pension (S2P, previously SERPS) during your career and whether your National Insurance contribution record is complete.
Contact the Department for Work and Pensions to check how much you are likely to receive as well as what your state pension age is. If you were born after 5 March 1961, it is likely to be 67 at the earliest¹.
Guaranteeing your child's mortgage
Once your children do leave home, you may find that you have lower ongoing household expenses and therefore more income to spare. However, one of the biggest challenges you and they will face is concerns about where they live. Over the last decade or so, rising property prices combined with relatively stagnant wages for young people and soaring rental fees have made it harder to afford a first home so it is little surprise that many are turning to their parents for help.
Some mortgage deals let borrowers use a parent’s income or savings to guarantee their loans. Typically, this means that you will become jointly liable for ensuring repayments are met. In some cases, you will need to put a certain amount of cash savings aside in a special account, earmarked for making up any shortfall in repayments.
Guarantor mortgages mean that young people can get onto the property ladder with a lower deposit or lower income levels than might otherwise be the case – but they do present a risk to the person acting as guarantor, and this should not be taken lightly. If your child is buying with a friend or partner, any help you give your child must factor in the additional risk.
If your investment portfolio has been running for many years, it may have grown to a level where you would benefit from working with a dedicated financial adviser – a professional who can ensure your investments are suitable given your objectives and who can help you maximise future returns.
An Adviser will also be able to look at your pension and other investments as a whole and help you strike the right balance between the two forms of long-term saving, taking into account tax rules and limits on lifetime pension holdings, for example.
Your own parent's financial situation
At this stage of your life, as well as worrying about your children’s financial circumstances, you may find yourself dealing with your own parents’ challenges. You and they should think as early as possible about the potential implications of one or both of them needing long-term healthcare, possibly in a nursing home. A specialist independent financial adviser can explain what the potential consequences for their home and other assets could be, as well as look at strategies that can help them and you minimise any inheritance tax bills. You could also look into setting up a lasting power of attorney on behalf of your parents, as a precaution, in case they suffer from serious physical or mental health problems in the future. Power of attorney lets you manage someone’s financial affairs even if they are not mentally incapacitated.
The cost of long-term care
Even if you are in good health, it makes sense to think about how you might pay for your own medical care in the future. As people enjoy longer lives, so the demand for long-term, residential care has grown and even though some financial support from the local authority may be available the cost of care can be very expensive.
It may be possible to set up a saving or investment plan to help you and/or your spouse meet care bills but it is certainly worth seeking expert guidance. An adviser who specialises in long-term care planning can explain your options when it comes to covering these costs.
You may have elderly parents that you are caring for, which may mean you are losing income; or you may be covering the cost of care yourselves. These are financial pressures that will need consideration.
Important information: Columbia Threadneedle Investments does not give investment advice. If you are in any doubt about the suitability of any investment, you should speak to your financial adviser. Data as at 30 September 2019 unless otherwise specified. Past performance is not a guide to future performance. The value of investments and any income is not guaranteed and can go down as well as up and may be affected by exchange rate fluctuations. This means that an investor may not get back the amount invested. Your capital is at Risk. The analysis included in this document has been produced by Columbia Threadneedle Investments for its own investment management activities, may have been acted upon prior to publication and is made available here incidentally. Any opinions expressed are made as at the date of publication but are subject to change without notice and should not be seen as investment advice. Information obtained from external sources is believed to be reliable, but its accuracy or completeness cannot be guaranteed. The mention of any specific shares or bonds should not be taken as a recommendation to deal. Issued by Threadneedle Asset Management Limited. Registered in England and Wales, Registered No. 573204, Cannon Place, 78 Cannon Street, London EC4N 6AG, United Kingdom. Authorised and regulated in the UK by the Financial Conduct Authority. Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies. columbiathreadneedle.com
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