In today’s financial climate, your investments will need time to grow, so whether you choose to focus on pension savings, alternative savings and investment strategies, or a combination of both, make sure you start planning ahead of time.
There are significant changes proposed to the rules at retirement for those in defined contribution schemes. If enacted, these changes will open up the possibility of taking flexible benefits at retirement from age 55 (scheme rules permitting) up to and including 100% withdrawal of the accumulated pension savings at retirement (with an income tax charge at marginal rates).
There is little doubt that pension savings should start as soon as possible, but for those looking forward to retirement in the near future, taking the above changes into account may give greater flexibility over the pension pot!
Finance for the future
Planning is a continuous process, and your financial plans should be monitored regularly with any necessary adjustments being made to reflect changes in your circumstances. Careful planning now can help to keep you on the path to financial success.
A realistic plan
Putting together a realistic plan can be a balancing act between your head (financially prudent strategies) and your heart (emotionally acceptable thresholds).
You need to bridge the gap between what you can expect financially and what you dream of achieving.
Try setting a number of short, medium and long-term goals and prioritise them within each category, in order to meet your objectives.
Being realistic about your objectives is important when putting together any financial plan. We can help you with this process.
Some key financial goals
- accumulate a sizeable estate to pass on to your heirs
- increase the assets going to your heirs by using various estate planning techniques, perhaps including a lifetime gifts strategy
- tie in charitable aims with your own family goals
- raise sufficient wealth to buy a business, a holiday home, etc
- develop an investment plan that may provide a hedge against market fluctuations and inflation
- be able to retire comfortably
- have sufficient funds and insurance cover in the event of serious illness or loss
- minimise taxes on income and capital.
To save or to invest?
When defining your financial strategy, it is important to understand the difference between saving and investing.
If you save money on deposit with a bank or building society, you will earn interest. If you buy shares or invest in a share-backed plan such as a unit trust or a life assurance policy, you will have the opportunity to earn dividend income and benefit from capital growth as the investments increase in value.
Records show that in the long term the best share investments outperform the best building society accounts in terms of the total returns they generate.
However, it is important to remember that shares can go down in value as well as up, and dividend income can fluctuate. If you choose the wrong investment you could get back less than you invested.
You will need to consider the most important factors that apply to you, as part of your investment strategy.
Paying tax on your savings and investment earnings is obviously to be avoided if at all possible. There are a number of investment products that produce tax-free income.
Premium bonds offer a modest ‘interest equivalent’, but there is a chance of winning a tax-free million!
If you have a lump sum to invest, you might consider an investment bond. This is often described as a tax-free product but the income and gains accumulating within the fund are subject to tax in fund (equivalent to basic rate tax). The ‘tax-free’ element is derived from the ability to draw an annual sum equal to 5% of the original investment for the life of the bond. On maturity, usually after 20 years, any surplus is taxable, but with a credit for basic rate tax. Higher rate tax might be payable, but a special relief (known as ‘top slicing’ relief) may be available to reduce the burden.
Stocks and shares
Investment in stocks and shares has historically provided the best chance of long term growth. Investment in unit trusts, investment trusts and exchange traded funds are designed to spread the risk compared to holding a small number of shares directly. Capital gains and dividends are charged to tax.
Bank and building society accounts
While history records that long term investment in shares should outperform savings with a bank or building society, you should not overlook (a) the higher degree of certainty over investment return (spread large amounts over several banks, though), and (b) the (usually) ready access to your funds. Remember that interest is liable to income tax.
Property is generally considered a long-term investment, whether commercial or residential.
‘Buy to let’ mortgages will generally be available to fund as much as 75% of the cost or property valuation, whichever is the lower.
Those investing in property seek a net return from rent which is greater than the interest on the loan, while the risk of the investment is weighed against the prospect of capital growth.