Galleon Wealth Management
Tel: 01473 636688 |
Menu

Galleon Wealth Management Blog

When you picture your retirement, what do you imagine? For some, it may be relaxing on holiday or spending more time with loved ones. But more retirees are choosing this time to launch a business.

Whilst retirement may have once been exclusively been associated with putting your feet up and unwinding. Today, it’s a milestone that’s far more flexible. It’s not surprising that more retirees are tuning into their entrepreneurial spirit to release dreams that may have been long-held.

According to the Office for National Statistics, the number of self-employed people over the age of 65 has more than doubled in the past 15 years. Almost half a million people that would have traditionally retired are continuing to earn an income this way.

There are plenty of reasons why these retirees are still working in some form, from boosting pension income through to enjoying what they do. If it’s something that appeals to you, there’s more than one reason to launch a business in retirement.

1. You’re more financially stable now

You may have hoped to start a business for many years, and for some retirement can be the perfect opportunity to explore those ideas that you’ve had.

Hopefully, you head into retirement financially secure and confident in your income. You’re also likely to have fewer financial commitments, such as paying a mortgage or raising a family. Without these financial concerns, launching a business in retirement can make financial sense. It may mean you’re free to invest in your venture without having to worry about the knock-on effects in years to come.

2. Transition into retirement

More retirees today are choosing to transition into retirement rather than the traditional ‘cliff-edge’ approach. There are many ways to do this, such as working part-time or flexibly. But if starting a business appeals to you, it can be the perfect way to strike the right balance between working and enjoying more free time.

As your own boss, you’ll be in a position to dictate your own hours and the type of work you do. It can be a great way to build an early retirement lifestyle that suits you. 

3. Create a sense of purpose

Whilst the financial side of retirement is often an aspect we focus on, including saving into a pension, the emotional side is just as important. For some approaching the milestone, it can be difficult. Our work is often used to define us and provide a sense of purpose. Without a traditional job, you can lose this.

Starting a business isn’t for everyone. But those that have the entrepreneurial spirit can find that it provides goals and aspirations that deliver a sense of purpose in life.

4. Boost your income

If your current retirement provisions don’t provide you with the lifestyle you want, a business can help increase your income. It can also provide flexibility if your current retirement provisions aren’t flexible, such as the income secured through an Annuity or Defined Benefit pension.

Of course, if you hope to launch a business, there are outgoings to consider too. How will your tax liability change? Will you need to invest in your business? Understanding the income your business will deliver and how this may affect your finances can provide confidence. This is an area financial planning can help with.

5. Turn hobbies into a business

Technology has opened up a whole new customer base for people launching a business. It gives you an opportunity to make money from your hobbies. If you already indulge a passion that you could sell, why not see if there is an audience out there? This is a great option for those that craft things that can be sold either directly or online.

Keep in mind, though, that whilst you may love a hobby turning it into a business will come with other work, from admin to sales. If this isn’t an aspect you’re interested in, it may be worthwhile enlisting some help.

6. Improve your wellbeing

Research has shown that keeping your mind and body active can improve your overall wellbeing in retirement. There are, of course, plenty of ways you can do this but it’s one benefit of launching a business in retirement, it’ll help give your brain a workout, whether you’re getting creative or focusing on the numbers.

Whilst income may not be the sole reasons for pursuing business ambitions in retirement, financial planning is important. It could affect the amount of tax you pay when accessing your pension, for example. Or you may need to understand whether you can sustainably afford to invest in a business. These are concerns that financial planning can help you get to grips with. Please contact us if stepping into entrepreneurship in retirement. We can help provide you with the information and confidence you need.

Do you want your investments to grow or deliver an income? Defining the goal of your investment portfolio can help you build a strategy that’s right for you.

For many investors, their investment goals start with focusing on growth with a long-term view of aspirations that are some years away. You may have started investing with your retirement in mind several decades away. Eventually, you may decide you want to start receiving an income. So, how should you invest if you’re at a stage in your life where you want investments to deliver income?

When you’re investing for growth, you want to back companies that are expanding. Depending on your risk profile, this may have included firms that are in the early-stage companies to maximise the initial amount you’ve put in. This means short-term investment volatility is to be expected. Investment values can fall, but with a long-term outlook, these dips should smooth out to deliver growth.

When investing for income, those that payout relatively high dividends are sought after. This will often be companies that are more mature and don’t invest as much of their profits into the business, providing investors with dividends. As a result, these firms typically don’t grow as much and can be seen as less risky. However, all investments involve risk and it’s important to consider this when investing for income as much as when investing for growth.

Investing for income

After years of investing for growth, to grow your pension or investment fund as much as possible, it can be difficult to know what to do.

As a dip in income delivered could affect your lifestyle, it’s important to look at the track record of both delivering income and preserving capital. This includes looking at how investments have performed during a downturn. As you’re accessing income now, rather than in the long term, volatility could impact your immediate and long-term goals. However, it’s impossible to predict how investments will perform in the future, past performance is not a reliable indicator. As a result, you also need to consider what other income streams you have.

You also need to consider when dividends will be paid. Will it be enough for your desired lifestyle and does it fit in with plans? Most dividends payout twice a year, if you’ll be relying on them to make up the bulk of your income, it can make budgeting more difficult. There are solutions to this, such as choosing investments that payout at different points in the year, or find that an alternative solution is better suited to you.

If you decide to go ahead with switching investments to an income focus, you have two options: build your own portfolio, selecting which stocks you want to invest in, or use an income fund.

They both have pros and cons that are important to weigh up in relation to your circumstances. But whichever you decide, diversification remains important, both geographically and in terms of sectors. It’s a step that can offer some protection against sharp market movements and preserve your income.

You don’t have to choose between investment or growth either. You can build a balanced portfolio that contains both elements if it’s in line with your wider plans.

When should you switch to an income strategy?

Traditionally, investors would have moved to an income-based strategy as they reached retirement. It’s an option that can provide additional income that supports your retirement lifestyle.

However, you may not need an income boost. If a Defined Benefit pension, an Annuity or other sources of income are providing what you need for retirement, you may decide that a growth strategy is still right for you. Retirements have also gotten longer as life expectancy has improved. It’s not unusual for today’s retirees to spend 30 or 40 years enjoying retirement. As a result, you still have time to invest for growth and switch to an income later in life when you need it.

There’s no right time to switch your investment to an income strategy. In fact, it may never fit with your wider financial plans.

What is important, is that you consider your investment goals and aspirations. Your investments should help you achieve your aims, whether this is to retire early or leave a nest egg for loved ones. Please contact us to discuss how your investment can help you move towards goals now and in the future.

Please note: The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

If you have a Final Salary pension, retirement planning can seem more straightforward. However, there are still important decisions that need to be made and it’s crucial that you understand the income it will provide. Whether retirement is just around the corner or some years away, reviewing your pension arrangements can provide confidence.

First, what is a Final Salary pension?

Final Salary pensions, also known as Defined Benefit pensions, are often referred to as ‘gold plated’. This is because your income in retirement is defined, protected and the benefits are typically competitive when compared to the alternative.

With the alternative pension scheme, a Defined Contribution pension, employees and employers make contributions, which benefit from tax relief and is invested. At retirement, pension savers have a lump sum of pension saving that will be dictated by how much they’ve contributed and investment performance. At retirement, they will have to decide how to access the pension and ensure it lasts for the rest of their lives.

In contrast, with a Final Salary pension, the pension scheme takes responsibility for how investments perform, which don’t have an impact on your retirement income. Instead, future pension income is defined from the outset. This is usually linked to how many years you’ve been a member of the scheme and either your final or average salary. At retirement, a Final Salary pension will pay out a regular income for the rest of your life.

Among the benefits of a Final Salary pension are:

  • You don’t take responsibility for investments: You don’t need to decide where to place your pension contributions, this is in the hands of the pension scheme trustees. The performance of investments won’t affect your retirement income.
  • It provides an income for life: Life expectancy can make planning for retirement challenging, as you don’t know how long pension savings need to last for. With a Final Salary pension, your income is guaranteed for life, taking away this element of uncertainty.
  • The income is usually linked to inflation: In addition to a lifelong income, Final Salary pensions are usually linked to inflation. This means your income will rise in line with the cost of living, preserving your spending power in real terms.
  • Many Final Salary pensions come with additional benefits: Your Final Salary pension may offer auxiliary benefits that provide peace of mind, such as a pension for your spouse, civil partner or children if something were to happen to you.

As a result, Final Salary pensions can be incredibly valuable for providing certainty and security in retirement.

Calculating your retirement income

The good news is that understanding the income you can expect to receive when you retire is usually straightforward.

How the income delivered from a Final Salary pension is calculated varies between scheme. But this will already be defined. If you can’t find the paperwork detailing this, contact your pension scheme. There will typically be three factors used to define your Final Salary income:

  • How long you’ve been a member of the scheme
  • Your final salary or a career average
  • The accrual rate, this is the fraction of your salary that’s multiplied by the years you’ve been a member of the scheme.

Let’s say you earned £60,000 at retirement and it was your final salary that was taken into consideration. You worked at the company for 40 years and the accrual rate was 1/60. Your income in retirement would be £40,000 annually using the below formula.

Years as a member (40) x accrual rate (1/60) x salary (£60,000)

You should receive an annual statement from your pension scheme, which will include providing a value of your pension at retirement.

Creating flexibility with a Final Salary pension

A Final Salary pension can provide you with security throughout retirement. Yet, you may still want a flexible income to meet your retirement goals. This may be because you plan to spend more in early retirement or at other points. For example, you may have mortgage debt remaining, plan to travel or want to financially support loved ones.

There are ways that you can achieve the best of both worlds.

Many Final Salary pension schemes will allow you to take a one-off lump sum from your pension to kick-start retirement. This will reduce your income during retirement but does provide the capital for flexibility if needed.

Other options include using a Defined Contribution pension to fund a one-off expense if you have one and using your other assets, such as investments, to create a flexible income. It can be difficult to understand how your different assets fit together to help you reach retirement goals. This is an area we can help you with.

Transferring out of a Final Salary pension

If you have a Final Salary pension, you may be considering transferring out.

At retirement, you do have the option to give up the benefits of a Final Salary pension and receive a lump sum instead, which must be transferred to a Defined Contribution pension. There may be some benefits to doing this, such as providing greater income flexibility, but for most people transferring out isn’t the most appropriate option for them.

Receiving a lump sum can seem attractive. However, what you’re giving up, a guaranteed income for life is often more valuable. It’s important to weigh up your financial security and retirement goals before making a decision. If your Final Salary pension is worth more than £30,000, you must take regulated financial advice first.

Please contact us to discuss your Final Salary pension and what it means for your retirement lifestyle. Usually, there are ways to create a flexible income stream that will suit your goals whilst retaining the security one offers.

Please note: Transferring out of a Defined Benefit pension is not in the interest of the majority of people.

Being self-employed comes with many perks, but it will mean you need to take more responsibility for your income and financial security too. From managing incoming work through to submitting tax returns, there are extra tasks you’ll be faced with. One of them is organising your pension.

Most people traditionally employed will now benefit from auto-enrolment. As a result, the number of people saving for retirement has seen a huge surge, but this has yet to be extended to the self-employed. Figures from the National Employment Savings Trust (NEST) estimate that just 24% of self-employed workers are actively saving into a pension and 55% want more guidance on how best to save for retirement.

With over 15% of the UK workforce now self-employed, the lack of pension savings could mean millions face financial insecurity in their later years. The good news is that it’s never too late to start saving for retirement and there are steps you can take to boost your pension.

Why use a pension to save for retirement?

The money contributed to a pension is locked away until you reach retirement age. Currently, pensions become accessible at 55 but this is expected to rise alongside the State Pension age in the coming years.

When you’re self-employed, your income may fluctuate and there may be periods where you’re not earning an income. It can mean that locking money away for potentially decades can be a daunting prospect. Yet, a pension remains the most efficient way to save for most people.

There are three key reasons for this:

  1. Whilst you won’t receive employer contributions topping up your pension, you will still receive tax relief. Assuming you stay within the limits of the Annual Allowance, you’ll receive tax relief at the highest rate you pay Income Tax. It’s an advantage that can help your pension grow at a faster pace.
  2. Pensions are usually invested and over the long term, this helps your savings grow. Over the decades you may be saving for retirement, investing can help your savings outpace inflation to deliver returns. As you can’t access these returns, you’ll also benefit from the compounding effect.
  3. Returns generated through investments held in a pension aren’t taxed either. Instead, your income is taxed when you start making withdrawals.

7 tips for building your retirement pot

1. Set up regular contributions

Regular payments throughout your working life add up. Getting into the habit of making consistent contributions to a pension can lead to security in later years.

This is something that many self-employed workers recognise. Some 56% said they favoured the idea of automatically diverting a portion of their income to saving for retirement. Whilst this is a key part of auto-enrolment for employed workers, you’ll need to take a more proactive approach. It can be as simple as setting up a standing order for the end of each month, so you don’t even have to think about it. 

Keep in mind, though, you won’t be able to make withdrawals from your pension before you reach retirement age. Ensure you’re putting away an affordable amount.

2. Contribute more when you can

Affordability is a crucial part of building up your retirement income. If your income fluctuates throughout the year, set up regular contributions based on what you know you can afford.

However, don’t leave contributions there. In the months where you receive a higher income, divert a greater portion to your pension for a retirement boost. Alternatively, you may want to contribute a lump sum at tax year end. Making a one-off payment to your pension is usually simple and can be done online in most cases.

3. Understand pension investments

How is your pension invested?

There are numerous options for self-employed workers, from using NEST, a workplace pension scheme set up by the government which allows you to choose a fund, to a Self-Invested Personal Pension (SIPP) if you’re confident choosing your own investments. What’s right for you will depend on your circumstances and investment knowledge.

Whatever options you choose, understanding your investments is important. All investments involve some level of risk and you need to ensure it aligns with your risk profile. This will depend on a range of factors, including how far away retirement is, the other assets you hold and overall attitude to risk. Understanding the risk and expected returns of your investments support retirement planning.

4. Keep track of your pension

Regular retirement contributions are important for building your pension up. However, your involvement shouldn’t stop there. Keeping track of how your pension is growing is just as important.

Areas to keep an eye on include investment performance and fees. Here, it’s crucial that you look at the bigger picture. At times, investment volatility will mean investment values fall. But when you take a long-term view you should see your pension gradually rising to reach your goals, thanks to contributions, tax relief and investment performance.

5. Recognise other assets can be used in retirement too

Pensions are an efficient way to save for retirement but it’s not the only asset that can be used to create an income or capital once you give up work. Where flexibility is needed, these other assets can provide peace of mind. They could include investments held in ISAs (Individual Savings Accounts), property or an emergency cash fund.

Take some time to understand how these might provide for you in retirement and whether you’re getting the most out of your capital. It’s a step that can provide confidence as you plan for retirement.

6. Check your National Insurance contributions

The State Pension might not be enough to retire on alone but for many, it’s an important foundation for creating a financially stable retirement income.

To qualify for the full State Pension, which will be £9,110.49 annually in 2020/21, you’ll need 35 years on your National Insurance record. It’s worth looking at how many qualifying years you already have and consider how long you expect to continue working. It is often possible to fill in the gaps if necessary, to boost the amount you’ll receive when you’re retired.

7. Speak to a financial adviser

Pulling together the different aspects of retirement planning can be difficult. How much do you need to retire comfortably? Should you increase your pension contributions? What income can you expect in retirement?

Working with a financial planner whilst still working can help make sure you’re on track to meet retirement goals. It’s a step that can address where gaps are and what you need to do to bridge them. Please contact us if you’re self-employed and have questions or concerns about your retirement. Whether you’re already paying into a pension or have yet to open one, we can help create a plan that allows you to achieve the retirement you’re looking forward to.

Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.