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Wave of unprepared consumers approaching retirement signals urgent need for financial planning

14th Feb 24 9:45 am

Over the past year, as budgets have tightened and economic uncertainties have grown, it is undeniable that the financial pressures facing consumers have intensified immensely.

Long-term goals like retirement planning have increasingly taken a back seat, with consumers understandably having to shift their attentions to immediate financial pressures and meeting day-to-day expenses.

Consequently, we have seen a growing wave of consumers who are unprepared for retirement. Our recent research revealed that over a third (38%) admit they won’t be able to fund a comfortable retirement, now estimated to cost £59,000 per year.

Perhaps even more alarming is that a further 41% revealed they haven’t calculated their expected retirement costs, risking a significant financial shortfall, with almost a third (30%) also not having any form of retirement plan.

Without sufficient financial planning, the risk of not being able to afford a comfortable lifestyle later in life is even greater. To help meet retirement expectations, time is a great asset when it comes to saving – the longer you save for, the bigger the pot at the end, not to mention the benefits that come with compound interest on investments.

Yet, despite retirement planning being so crucial to us all, our research further revealed that 59% of respondents have not sought professional advice or guidance regarding their retirement and a further 40% do not know how much they are paying in fees to get their pensions managed.

That being said, there are some simple steps that consumers can take to be better prepared, ensuring their finances are in the best shape both in the short and longer-term:

  1. Maximise your tax-free allowances: ISAs and pensions allow you to benefit from tax-free growth over time – with maximum individual allowances each year of £20,000 and £60,000 respectively. You should use as much of these allowances as you can afford. For pensions, you may also be able to boost your pot by using up to three years of previously unused allowances. For ISAs, you can benefit across the family with, for example, £58,000 a year able to be sheltered from the taxman for a family consisting of two adults and two children.
  2. Ensure you have diversified investments: It’s impossible to predict which assets will perform best from year to year. For example, among a list of 15 major asset classes, it is commodities, REITs (property trusts), developed world equities, gold, emerging market equities and high yield bonds that have all topped the table in recent years for sterling-based investors – and in other years have often skirted the bottom of the table. To ensure you can target growth opportunities and also protect against potential losses, it’s crucial to have an efficiently invested mix of assets in your investment portfolio, whether that’s in your pension, ISA or taxable portfolios.
  3. Minimise your fees: If there is one thing you should do over the next few months – and a habit to embed for the years to come – you should scrutinise the fees you are paying on any investments. If the all-in charges are too high, you should take your business elsewhere. What’s too high? As a rule of thumb, your total investment costs shouldn’t come in at more than 1% each year. If you are also paying for financial advice, that might rise to a total all-in cost of 1.4%. If you read the finer print, you may find that you are paying 1% per annum more than that, or even double in many cases. I have said before that the impact of what seems like a minor difference can be hugely costly in reality – overpay by 1% per annum in fees, and you will be giving away 14% of your capital unnecessarily over 10 years. This means that for every £100k that you have invested, £14k could be in your pocket rather than someone else’s (assuming 5% average annual returns). High fees are the single greatest threat to the value of an investment or pension portfolio – and you shouldn’t hesitate to act to rectify the situation. Investment is important to help combat the long-term effects of even subdued inflation; just make sure you are not being punitively charged for doing so.
  4. Use your Capital Gains Tax allowance: When we make a profit from selling an investment capital gains tax (CGT) may be due. The individual annual exemption amount was reduced from £12,300 to £6,000 in 2023 and will be cut further to £3,000 from April 2024 (double that with a partner’s allowance). So, if it is not possible to shelter potential gains in a tax wrapper such as an ISA or pension, you should act before the new tax year starts in April to benefit from a higher allowance.
  5. Consider financial planning advice or guidance: Studies by the International Longevity Centre (ILC) have found that those who take regulated financial advice are measurably better off a few years later. However, whether or not to take advice will often depend on your age and circumstances.

Financial planning and establishing a proper retirement plan are extremely important. Without this preparedness, it may mean you make mistakes you didn’t even know you should have avoided. While it can sometimes be challenging to see the value of planning immediately, putting measures in place now will significantly pay off in the long run.

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