The PAYE tax deadline has just passed, and many hurried pension contributions have been made to avail of valuable relief in the 2022 tax year. Because of the nature of deadlines, important matters can be left until late in the day, with the focus on meeting the deadline at all costs. When it comes to pension contributions and retirement planning though, the team at Acuvest believes that the tax deadline should play a more minor role…
Don’t centre your focus on the tax deadline
The tax deadline is important – we get that and recognise that if you delay making your contribution until after the deadline, you lose the opportunity to offset your contribution against the previous year’s tax bill. After all, the generous tax breaks that apply to pension contributions are one of the primary benefits of saving within pension products.
But while saving tax is important, it should not be the primary focus of your retirement planning. The primary focus should remain on the plan itself.
Where they are appropriate, we are strong advocates of setting deadlines to improve focus and drive action. A good example of this is our annual strategy update and review meeting with clients. While there is no strict deadline for this meeting, when it comes to your finances and investments, it is the most important meeting of the year. The purpose of this meeting is to review what has been achieved over the past year and plan priorities for the year ahead.
The product is important, but won’t change the big picture
Like the previous point, some people can get fixated by the pension product that they choose. It is important that you have access to good investment funds, with a manager that is capable of delivering on their investment objective. However, it is much more important that your investments reflect your particular investment needs. For example, if your strategy suggests that you should have a certain proportion of your assets invested in equities, you need to have selected a fund that is going to serve that role for you in the way that you want (i.e. global or regional, passive or active, with or without foreign exchange risk), and that you and your adviser fully understand the range of outcomes that you should expect from the investment.
In addition, the charges within the product are important. After all, the money that you can save by minimising the charges directly adds to your returns, meaning more money in your retirement fund later in life. Expert product selection is essential, but once you have decided what you need to have, this relatively straightforward task is one of the reasons your adviser is paid.
Retirement is about your objectives and choices
At Acuvest, we believe that retirement planning is not about selling the benefits of tax relief or the features of product A over product B. Retirement planning starts and ends with you and your vision for what the later stages of your life will look like. It is about understanding what your goals and objectives are for retirement.
This might include when you hope to retire, will you continue working in any capacity or are you putting the feet up for ever more? Where will you live in retirement, how much do you want to travel, what’s your vision for much later in life when you may need care and what are your thoughts on gifting to loved ones and estate planning?
These are all real choices that you need to consider and plan for. Maybe you’re in the fortunate position of all your future objectives already being within your financial grasp. But for many people, there are trade-offs to consider.
As part of this, where you currently are on your retirement planning journey needs to be considered. Where will you get more value and reward with the financial resources you have today, and those you will have into the future? An important question is whether you need to save more now for the future, or not. Maybe you are financially enabled to live life to the maximum today AND in retirement. Or maybe you need to make some choices.
No-one said it would be easy!
The key is good scenario planning
While none of us can foresee the future with any degree of precision, at Acuvest we believe it is hugely beneficial to pull together a base case financial plan. We then develop some alternative scenarios, so we can consider what are be the implications of things that might happen, both positive and negative, to see if any of these should be built into your plans now, or potentially parked for looking at again further down the line.
The planning process starts by helping you identify your goals and aspirations, and we then examine your financial capacity to achieve them, by plotting out what your cashflow situation is forecasted to be… for the rest of your life. Now we can see if your future life is achievable or not.
This approach allows us to then consider any range of different scenarios that you might be considering. What if you retire five years earlier? What if you live abroad for three months of the year or what if you start gifting assets to your loved ones earlier than you had previously anticipated doing so? By saving more (or less) now towards your retirement, what impact will that have? Each of these scenarios has a cost, but we can help you make informed and wise decisions about each of them.
As you plan out your financial affairs for the rest of your life, it is vital that your financial resources are invested wisely to ensure your plan can be achieved. This investment plan needs to reflect your goals and your appetite to take risk and should be reviewed regularly to ensure those needs continue to be met.
Only then, it is important to give due attention to the pension product chosen and to ensure tax relief is maximised. But this should be at the end of the process, and not the starting focus of it.
Will your retirement plan achieve your vision for later in life? Having a plan does not provide a guarantee of success, but asking the right questions gives the opportunity for insights into how you are doing. Then following a good planning & ongoing management process will give you the opportunity to take actions to help you along in the right direction.