The Many Different Shades of Retirement Planning
For my parents’ generation, retirement planning was pre-defined with a set retirement date and pension income. On a date, chosen by your employer in many cases, you packed your bags, accepted the gold watch, and rode into the sunset with a nice guaranteed income for life.
Those days are gone now for all but a lucky few, and the retirement landscape will be almost unrecognisable for future pensioners. The options available now for retirement savers and pensioners are far wider, and with that added flexibility comes increased complexity. Many of the decisions that were once made for us, now have to be made ourselves. Some of these decisions need to be made decades in advance without any advice or help. Through some case studies, I will highlight some of the key aspects of modern retirement planning strategy, which may help when making important decisions about retirement and pensions.
In almost all cases I encourage my retirees to plan for and maintain a busy schedule. This can be through further work, hobbies, volunteering, travel and family time. Doing this successfully can be hugely rewarding, but takes some planning. This is why we start discussing retirement planning with clients from as early as 50 onwards. How different individuals’ approach this will depend on their circumstances so I have set out some examples below.
Joe – Multi National Employee
A senior employee of a large multi-national will almost certainly be part of the company pension scheme. If they aren’t, they should be! The combination of employer and employee contributions can super-charge a retirement fund. Most multi-nationals will also set a normal retirement age for employees. When this is the case, there will be a clear glide path towards this date, often from as far as 10 years out, with possible early retirement offers, training in replacement staff etc. As this employee only has a small amount of control over the management of the pension, and also their own retirement date, there are not as many decisions to be made around a retirement planning strategy.
A key focus for this individual should be on their own funding and maximising contributions. I would also encourage employees to negotiate for a higher employer pension contribution at every salary review. It is the most tax efficient remuneration available today. They can also focus on their life after retirement. Will may be opportunities to continue working, either as a consultant into the same industry, or in a completely different space, to supplement retirement income. For an employee, pension, funding will be relatively consistent, so it should be relatively easy for a good pension advisor to project the likely retirement income from their pension. This will allow individuals to plan, with reasonable accuracy, when they will be in a position to ‘retire’. This can give them valuable information when planning the next steps in their career.
Niamh – Self Employed Business Consultant
Current pension legislation heavily restricts the retirement planning options of the self-employed in Ireland, which I feel is very unfair. They are restricted to personal pension contribution which have relatively low annual maximum contribution limits. It is therefore imperative that they start contributing to pensions early. On average, the self employed professional will retire later than their company director counterparts for this reason. Many self-employed professionals look to incorporate or establish service companies to help with this problem, and that is an option that should be explored in many cases. In the Medical and Legal Professions it can be tricky to use service companies, but for those offering general consultancy services with a reasonably high turn-over, a company can be extremely tax efficient and help significantly with retirement planning strategies. Contributions to pensions for the self employed can be much more inconsistent than for an employee, as income changes each year. Therefore, it is important to adjust and update any financial plans regularly. They will have the option of using some retirement reliefs, and may have the option of selling their business closer to retirement, and this can be used in conjunction with pension funding to provide tax free lump sums.
Frank – Company Director
Company Directors have very flexible options available to them when it comes to retirement planning. There are now some wide-ranging reliefs and limits available to company directors, which makes planning for retirement a little bit easier. As Company Directors come under many of the same pension funding rules as the Public Sector, they have very generous limits on how much the employer (company in this case) can contribute to their pension each year. These limits are far higher than their self-employed counterparts.
There are very flexible rules around accessing pension funds, even from as young as 50, if certain criteria are met, which may allow access to a tax-free lump sum while not having to draw from the rest of the fund. In many cases, I have worked with company directors who have taken an early retirement by selling their business. They have benefited from retirement relief or entrepreneurs’ relief on selling the business, while deferring their pension drawdown by a few years. This allows the continued growth of their pension tax free, while using the business sale proceeds to live off for the intervening period.
If a company director decides to continue working, they can access their pension funds from age 60, while still continuing to work in the business. Some like to take this approach if there are children or younger management coming up to take over the business, but the owner is not quite ready to completely hand over the reigns.
In all cases, I feel it is important to plan for all eventualities. Taking early retirement is a dream for many, but is hard to achieve in reality. It requires careful retirement planning from a reasonably long way out, sacrifice and disciplined investing. It only works if individuals have a clear plan for their lives post retirement.
Have you started retirement planning yet? Putting a plan in place will help make your retirement years more comfortable.