It is assumed by many successful business owners and corporate high-flyers that they have little to be concerned about when it comes to financial planning for retirement. Pension plans have been put in place that should, according to projections, provide a retiring income commensurate with final salaries. With large financial commitments such as mortgages paid off, the assumption is that they will have greater disposable income to enjoy. The truth though, according to research carried out by HM Treasury, is that only 22% of soon to be retirees have any real idea of the value of their pension pots.
Increased leisure time means increased spending
Retirement usually brings increased leisure and social activities. Bucket lists are ticked off, more frequent and longer holidays are taken, and extra golfing weekends are booked. It might become a priority to help the children or grandchildren get established, and then of course, there are those unexpected expenses which can crop up at any time. With so many things to consider, more in-depth financial planning needs to be undertaken, to ensure such things can be comfortably afforded.
It’s easy to presume that, as a high earning executive, all that’s required to ensure your desired lifestyle is to organise your assets. However, this is not the case. Not only are high salary earners likely to have more complicated pension compensation arrangements, they are also likely to have assets spread throughout other countries. They may be living an expat lifestyle elsewhere in Europe, commuting to the UK as and when required, or have already retired abroad. Consequently, wealth management and preparing for retirement becomes more complex.
Are lower contribution limits affecting your pension?
As a high salary earner, you may have additional financial arrangements in place, geared to improve your overall pension. These may range from salary plus bonus packages, delayed or postponed compensation arrangements, offshore and onshore pensions, share schemes, and endowment and medical plans. Your pension arrangements should be an integral part of these overall plans. With the recent reductions in annual pension contributions by the government, an assessment of any changing investment conditions should be evaluated.
Consider regular, in-depth reviews
Depending on personal situations, seeking sound financial advice and looking in other directions to consider different investment options to maintain projected benefits should be considered. In the same pension planning survey carried out by HM Treasury, only 14% of those interviewed felt they were confident enough to plan their financial future without professional advice. High earners may well consider - taking accumulated wealth into account - that their pension benefits are of little concern, yet they can be substantial and used for those unexpected expenses that will inevitably arise.
Review your whole portfolio
With the current levels of uncertainty across Europe and the wider world, a broad approach to financial planning needs to be undertaken. All assets and investments require in-depth assessment with a view of pin-pointing any possible future issues such as increasing investment risks, or a reduction in projected income.
To be able to plan future investment accordingly, an honest appraisal of individual expectations is needed. What type of lifestyle does one want or expect after giving up work? What level of investment risk are they comfortable with, and how can you best protect and limit tax liabilities on assets passing to beneficiaries? Once these parameters are understood, investment options can be analysed and investment plans put in place that meet the client’s requirements.
Vary your investment portfolio
The larger your financial assets, the greater the effect of any detrimental changes in tax relief for pension contributions. To minimise these risks, a broad spectrum approach to pension planning could include workplace pensions, ISAs, property, enterprise investment, venture capital, and overseas investment opportunities. With sound financial advice, a varied portfolio can be built up based on predicted return on investment, and the client’s approach to reward versus financial risk. Not only does this style of investment portfolio minimise the risk, it also allows easier management of the individual products, while reducing any short-term risk to income predictions.
Many businesses pay management and executive bonuses in a mix of cash, shares, or share options. As a long serving executive, accumulated company shares could amount to a large chunk of one’s pension portfolio. Even with a well-balanced, growing company, reducing the shareholding and investing the balance in other areas will help improve options, and reduce damage in the event of any future business failure.
For those already domiciled in Europe, a Qualifying Recognised Overseas Pension Scheme (QROPS) may be of benefit. Although not operated in the UK, these plans are fully approved by HMRC and tax relief applies. A QROPS is a pension scheme operating in the main European countries, and derived income is not subject to UK tax law. For those expats who qualify, looking into the range of plans available could have significant advantages. Also worth noting is that with private pensions maturing at fifty or fifty-five years of age, QROPS funds are not subject to UK inheritance or death benefit taxes.
Protecting your family’s wealth
As they get older, most people begin considering how best to protect their beneficiaries’ inheritance. One method worth considering is to open pension plans for the children, with most opting for ISAs since they don’t mature until the recipient is 55. Nonetheless, other plans are also available where you can stipulate the number of years you have it locked, maturing when the children are in their mid-forties or mid-fifties, giving them a little cash windfall they can use to reduce their mortgage or to boost their own pension portfolio.
Is your partner or spouse working, does he/she already have a pension? In many instances, the answer is no to both. There is nothing stopping you from contributing to a pension up to the maximum £40,000 per year for your significant other. Although tax relief will go to the person holding the pension, making maximum use of all allowances available makes good fiscal sense.
Next time you’re mulling through your retirement investments, wondering whether you’ll be able to afford to add this or that to your bucket list, consider seeking some professional, unbiased, financial advice. You’ve worked hard for many years to enjoy the benefits of a comfortable retirement, it makes sense to ensure you maximise the rewards you’re entitled to.