Are you making suitable plans for retirement?

Kunjan Sembhi, an associate at law firm Shoosmiths, says: “This is not to say employers cannot choose to keep a retirement age in place in their business or to retire an individual on a case-by-case basis.”

The fact workers cannot automatically be dismissed at the age of 65 means retirement is now usually a discussion between employer and employee. “However, employers can find it difficult to approach a conversation with an older worker about his or her retirement plans. Simply asking the question could be considered to be discriminatory,” says Kunjan.

She talks of the change to the flexible working request procedure. Any employee can request for flexible working once he or she has been employed for 26 weeks: “This should allow older employees, who want to lower their hours before retiring completely, to do that.”

But there can be some disadvantages for those working past the age of 65. Employers can legitimately stop certain benefits for workers over the age of 65 without any discrimination issues arising. The Equality Act 2010 specifically allows employers to stop insurance-backed products, such as private medical insurance, at the age of 65. However, this only applies where the insurance is provided by a third-party company.

Wealth protection

Of course, planning for retirement is different for every individual, and the changes and decisions people make in pre-retirement could potentially have a significant impact on their lives later. Kunjan says individuals typically use the change of circumstances to take advice about wills, powers of attorney inheritance planning. “It often ties in with a lump sum paid from a pension fund, salary or drawings being replaced by ongoing pension income or the sale of an interest in a business”, she says.

For Kunjan, the first step is to make a will. She explains more than 60 per cent of the population does not have a will, yet this fundamental document provides a framework for inheritance tax planning, distribution of wealth and transmission of assets through generations and outlines to whom specific assets pass on death.

Varied family circumstances with second or third marriages, stepchildren, grandchildren from unmarried parents and estranged family relationships are often opportunities for disputes and difficulties where inheritances are concerned – a clear, professionally drafted will is vital to make clear your wishes.

Next comes power of attorney, a document in which you appoint someone to manage your financial affairs and health and welfare decisions in situations where you cannot do it yourself.

Kunjan says a common misconception is your spouse or next of kin will have this role. She explains: “There is no one who has this right in law unless you prepare a lasting power of attorney.”

Tax law changes regularly and tax planning for your estate can take many years to become effective. You may wish to create trusts for members of your family, for example, grandchildren or children.

You may want to consider setting up a charitable trust or making gifts of cash or items to family, friends or a charity.

You should consider your own cash flow requirements, capital and income needs and any projects that you have for the future – any kind of tax planning that requires you to give away capital or assets will have an impact later on.

Pensions are key

Your pension is likely to form one of the biggest parts of your retirement planning, and it is important you understand the type of pension saving you have made to enable you to plan your retirement adequately. Kunjan says: “Pensions come in different forms and range from a final salary occupational pension scheme to a money purchase group personal pension plan, to a self-invested pension plan or a small self-administered scheme, not forgetting your state pension.”

She says final salary schemes provide members with a pension based on the level of their salary on retirement and the number of years they have been members of the scheme. But because they are expensive, it’s more common to see money purchase arrangements that consist of employer and employee contributions collected into a “pot”, which is then used at retirement to buy an annuity.

When reaching retirement your income can be taken in various ways and Kunjan says the Government has been working to make access to pensions easier and more flexible. She says: “Under the current tax regime members are entitled to take up to 25 per cent of their pension saving as a tax-free cash lump sum. It should, however, be borne in mind that by doing so you would reduce the amount of pension you would then be able to receive from the scheme.” A lot has appeared in the media about pension scheme members being approached by so-called “pensions liberation” schemes where the liberator makes an offer to a member, encouraging them to transfer his or her benefits out of a registered pension scheme and take pension benefits before his or her normal minimum pension age. Kunjan says: “While not illegal, it does have the unintentional consequence of breaching HMRC rules with adverse financial consequences for the member.”

Good advice

Samantha Parkes, a chartered financial planner at Charles Stanley, says retirement has changed considerably with each passing generation. Some retiring now can expect to live 25 years or more and have possibly a more healthy and active life than their parents would have had.

For Samantha, it’s important to remember retirement income needs will depend on the envisaged lifestyle. She says: “Our day-to-day living expenses will hopefully go down, but if we plan to take that trip of a lifetime or have expensive hobbies, then we need to allow for that.”

Traditionally, many final salary schemes were planned on the basis of achieving a pension of two-thirds salary in the year before retiring if full contributions had been made over 40 years. Suggesting this may be a benchmark you want to use, Samantha adds: “Alternatively, you might want

to think in terms of a specific target income based on what that would buy today and then adjust that for inflation over the intervening years.”

The income you can achieve from a pension varies depending on whether it is taken as an annuity or via income drawdown (where income is taken directly from the pension itself). It also depends on whether the pension funds were built up via a defined contribution scheme or a final salary scheme pension. Depending on the lifestyle you wish to have in retirement, you may feel the maximum income you can generate from a pension is not enough and you choose to make other investments during your working life into things such as insurance bonds, ISAs, property and so on. You may even invest in fine wines, antiques and other areas you are interested in.

Samantha understands individuals may have several different pension pots built up over a number of years covering different periods of employment or selfemployment. “This may lead to lack of a consistent investment strategy across all of them and possibly duplicating some charges,” she says. “It is important to review these plans to see if any improvements can be made through, for example, consolidation, lower charges or better investment strategy,” she says.

One of the major gripes investors had in the past with pensions was lack of flexibility at pension age, but Budget 2014 proposals changed this. Samantha says: “From April 2015, pension investors in defined contribution schemes, such as personal pensions and self-invested personal pensions, who have reached 55, should be able to receive the whole of their pension as a lump sum.

“Generally, the first 25 per cent should be tax free, while the balance is taxable.”

The position for those in final salary schemes is unlikely to change, and there might be restrictions preventing people transferring into a defined contribution scheme.

The changes might give retirees more options to do what they want with their pension savings. Freed of the need to take an income, it may help some to clear debts, such as a mortgage. Those with larger pension pots may decide to use the money to invest in property or high-yielding investments.