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Kirk Rice Blog

Retirement Planning – Will You Be ready?Written on June 28, 2022 by Kirk Rice LLP

Retirement Planning – Will You Be ready?

We are in a new tax year, with new annual allowances for pensions and many other types of investment, making a resolution not to leave investment until the last minute could pay dividends.

With the future looking far from certain, making financial plans today should help ensure you aren’t panicking at the end to make the most of your money.

It’s time in the market that counts

The earlier in the tax year you can start making contributions, the better, as the money has more time to grow. The longer our money has to grow, the better it is for us, so starting to invest money at the beginning of the financial year rather than waiting until the end will make a difference.

Thinking even earlier

While getting your investments in at the beginning of the year is a winning strategy, long-term investors can benefit even more by investing early for the long term.

Products such as Junior ISAs for children, and pensions for children and adults, allow you to make the most of this strategy. Suppose you open a Junior Investment ISA for a child. In that case, you know it will be 18 years before they can use the money, giving it plenty of time to grow. You can be braver with your investment strategies, knowing there will be time for any dips in the market to be rectified and for dividends to be reinvested.

Pensions also have a very long timeframe. Opening a pension for a child is a real example of an early bird strategy. They won’t be able to use the money until they are in their sixties, but you can still benefit from a government contribution to their pension pot and from time for the money to grow.

Even though most children do not have a taxable income, the state will still top up parental contributions of up to £2,880 a year into a personal pension. That means that every year the government will put £720 towards your child’s retirement.

Even if the time when they need a pension is a long way off, adopting this strategy early on may mean that they need to divert less of their own income into pensions in their early adult lives so that you will be relieving their financial pressure from a younger age.

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The state pension and how it is protected

While the State pension is paid to everyone when they reach state pension age, provided that they have qualifying years of national insurance record, there are many reasons not to see it as a guaranteed source of income. These include:

  • Changes to the age at which you can claim your state pension

Not everyone wishes to work until they are in their late sixties, but the age at which you can receive your state pension has been rising rapidly and could rise again. Currently, the state pension age is 66, which will rise to 67 for those born on or after April 1960. It is scheduled to rise further to 68 for those born on or after April 1977, while a review is underway to decide whether it could rise even further.

  • No guarantees of inflation protection on state pension payments

The state pension has been protected by what is known as the ‘triple lock’, meaning that it rises each year in line with the highest of three possible figures, inflation, average earnings or 2.5 per cent. However, during the pandemic, part of the lock was suspended, meaning that pensions increased by 3.1 per cent, whereas under the ordinary system, it would be 8.3 per cent.

The UK Government has said it remains committed to using the triple lock for the rest of the current parliament, but there’s no guarantee that it will continue beyond that. For those of us who will not retire for some time, there’s little certainty that state pension payments will keep pace with rising prices.

  • An amount that is insufficient for most pensioner living expenses

With income from the state pension uncertain and kicking in too late for many people’s retirement plans, it is more important than ever for everyone to put money away for retirement.

Here are some ways to make sure you save efficiently.

  • Use the tax breaks available

The government gives generous tax breaks to help us save for retirement, meaning that those in higher tax brackets can reclaim the tax they’ve paid. Make the most of this by paying into a pension.

  • Take appropriate risk

Longer-term investing can also help your money to grow faster than inflation, although you can expect some volatility along the way. Historical studies show that money in equities outpaces that in cash and other less volatile assets over most long periods of time, so taking some risk with investments that you will not need to use for a while makes sense.

  • Take advice

If you’re unsure whether you’re on track for the retirement you want, speaking to a financial adviser can help you to understand whether more action needs to be taken.

Book a call with a Kirk Rice Financial planner call 01344 875000, jump on the web chat or connect at info@kirkrice.co.uk.

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