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Top tips for retirement planning – 5 things you should do now  

Written by: Mark Parkinson
Preparing to retire is an essential life step that we all must take at some point in order to ensure that we get the retirement we deserve and that we’ve worked so hard to get.

It is necessary to plan in advance, working out the amount of money that you will require to live the lifestyle you wish, making the most of allowances available to you and managing cash flow to reflect expenses in retirement once you are no longer working.

Here are 5 things you should do now to prepare for retirement:

  1. Work out how much money you need to comfortably retire

The first step is understanding how much money you will need to maintain your lifestyle, or your desired lifestyle, and enjoy a comfortable retirement.

A good tip is to make a mock budget, estimating how much money per month you will need to live the lifestyle that you want when you are no longer working full time.

It’s important to understand your unique retirement needs; every person is different and will have different priorities and requirements in retirement, so this step is personal and needs to be worked out on an individual basis.

For example, for some people, a monthly weekend or day trip away may be a key aspect of retirement, whereas for others this may be a luxury.

  1. Consider your current pension pot

Are you saving for a private or company pension at the moment? If so, you should take the time to work out what you will have saved by the time you reach retirement. If this is not going to be enough, you should increase the amount you are saving each month and prioritise effectively. In the long term this decision will pay off as you will be able to fall back on the money when you are no longer working.

  1. Understand allowances

Ensuring that you’re making the most of everything that’s available to you, both now and when you retire, is key to living the lifestyle that you deserve.

As well as forward planning and assessing your current pension pot, it is essential to understand all of the schemes available to you that could enhance your retirement package, including the Personal Allowance, ISA accounts and topping up your state pension.

Take time to look into these options – they could be the key to a retirement fund you’re truly happy with.

  1. Make the most of allowances – which ones work for you?

Your Personal Allowance is the amount of money that you can earn each tax year before paying income tax. The standard Personal Allowance for the 2018/19 tax year is £11,850. Withdrawing money from your pension, even if it’s to invest in something else, allows you to use this tax-free allowance. You will pay tax on any income above your tax-free Personal Allowance.

Individuals within the UK have an ISA allowance which is currently £20,000 for tax year 2018/19, and there is also a Junior ISA allowance of £4,260 for children. This allowance can be paid into cash, stocks and shares, or a mixture of these. ISAs are an excellent alternative way to build wealth for retirement, as they are very tax efficient. If you are looking for a way to save money on a monthly basis, this allowance could work for you.

In terms of retirement saving, you can set aside up to £4,000 a year into a Lifetime ISA, until you’re aged 50, and the government will add a 25% bonus to your savings. You can take your savings out of a Lifetime ISA when you’re aged 60 or over, without paying a charge. If you contribute the £4,000 into a Lifetime ISA then you only have £16,000 remaining for your standard ISA allowance.

The pension annual allowance is the overall amount of pension savings you can make within a tax year without triggering any tax charges – you should make the most of this where possible. The annual allowance for tax relief on pension savings into a registered pension scheme is currently £40,000 (for 2018/19). This includes contributions made by someone else into your pension, such as your employer. You can also contribute into a pension for your non-working spouse and children.

It is important to remember that your annual allowance will drop if you take cash from a pension pot, cash or a short-term annuity from a flexi-access drawdown fund, or if you take more than the limit from a capped drawdown fund. The allowance can also be tapered if you are a high income earner.

  1. Prepare to manage your cash flow

Aside from savings, as a retiree you will likely receive income from a variety of sources at different times, such as from property investment. It is important to foresee how you will manage these payments in a way that reflects the changes to your lifestyle, making sure that you always have the right amount for what you want to do in life.

You will need to take into account the cash you need for short and long-term needs, including everyday living expenses, short-term savings goals and for those unexpected emergencies.

You will also need to make sure that your money can be easily accessed, moved and invested when needed. Cash flow planning is key to making sure you get the retirement you’ve worked so hard to get to.

It is essential to determine and understand where your money will come from when you are no longer working full time, and if your calculations indicate that you’ll fall short, it’s a sign to put more effort into saving now, to ensure you have a back-up option when these income sources do not suffice. 

Mark Parkinson is a partner at wealth management service Tait Walker

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