How will you fund the longest holiday of your life?

Posted on July 27, 2017 by Daniel James

Coins/pension blog imageWith life expectancy increasing, we’re enjoying longer retirements than ever before. If you retire at 65, it's possible that you'll live for as long as 20 years; if not longer. With that in mind, there’s an ever-increasing need to think about how we want to enjoy our golden years and the money we'll need to fund our adventures. Exciting right?

It’s constantly drilled into us that we need to start a pension plan, but it’s something that we put to the back of our minds for a later day. Why? I’m guessing it’s the mind-set of ‘retirement is years away’. True. But the younger you start the better. After all, a bigger pension pot means more opportunities (and more fun!).

In my experience as an Independent Financial Adviser (IFA), vets often want to do more with their pensions, but are constrained by time. Because of my experience, I understand the pressures of your job and how this can make you time poor – so I’ve put together five things you need to know about pensions.

Workplace pension scheme

The biggest reform to pensions is that employers are now obligated to provide a qualifying pension scheme to their eligible employees – great news if you’re an employee. This means that if you’re an employed vet, your employer should be talking to you about being automatically enrolled into a workplace pension. If you haven’t, speak to them soon as they’ll need to organise it as soon as possible.

As an IFA, I’d recommend joining your employer’s scheme. But bear in mind that an Auto Enrolment scheme will provide you with a basic level of income. Therefore, arranging an alternative personal pension will help to bridge the gap.

Small vet practices may not have had a workplace pension before, or an independent vet practice may not know how to set one up – this is where Lloyd & Whyte can help. Many small business owners’ staging dates are approaching and yours may have passed without you realising it.

This doesn’t only affect vets either; it affects anyone employed within the veterinary industry such as nurses; pharmaceuticals, anyone working at a zoo, laboratory or animal husbandry.

  Find out about our workplace pension service.

Investing your money

After a long career in the veterinary profession, you may wish to retire early and take a bit of time for you and your family – I know that’s something I’m looking forward to in retirement. However, retiring early may mean needing another source of income. Such as: property investment, private pension schemes and long-term investments.  As a vet, you may even consider investing into a practice.

All of these options have their own advantages, disadvantages and tax implications. For example, pensions can be a very tax efficient way of saving – but only if you don’t exceed your annual and lifetime allowances.

Being tax efficient

Being able to vary your income is great for tax planning. The first 25% of your pension fund is available tax-free. Since April 2015, you’ve been able to take this as a lump sum from your 55th birthday.

You can decide to spread your tax-free cash equally throughout your withdrawals. 25% of each withdrawal will be tax-free and allow you to receive more each year whilst staying within a lower tax banding, depending on your circumstances.

If you withdraw a large amount, you may have to pay 40% income tax. After saving into a pension in order to receive tax relief, why throw that away at retirement? Under the current tax rules, you could withdraw approximately £55,000 each year without paying higher-rate tax, if you’re receiving no other income.

Pension freedom – the shackles are off, what now?

We’ve now entered a new era of pension freedom following the biggest shake up in a generation. As of April 2015, millions of people reaching 55 have had total freedom over how they spend their pension pot. The idea being a way of enticing young people to save more meaningfully for their retirement, knowing they’ll have full control of their money when they get there.

While pensions are still a great way to save for retirement, the options are now potentially limitless – it’s the wealthiest you’ll ever be. So with access to a lifetime of savings, what do you do? You may see it as the perfect time to treat yourself to a holiday of a lifetime, that sports car you’ve been dying to drive, or fulfilling that dream of owning your horse. But what if you run out of money? It’s important to enjoy your retirement. After all, you deserve it, but it’s equally important not to be frivolous and get carried away. Outliving your retirement fund is a very real risk. After all, state pensions are only designed to pay for basic needs.

There used to be just two options; income drawdown and an annuity.

Income drawdown

In my experience, vets are often careful savers and will have built up larger funds. As a consequence, savers with larger funds were given more options and could leave pension funds invested whilst drawing an income from the growth, called an income drawdown.

Annuity

Traditionally, annuities have been the most common option for those reaching retirement. They provide you with an income for the rest of your life, but also restrict the access to the money once you’ve bought the annuity. This may seem restrictive, but it does mean you know exactly where you stand and can plan accordingly.

Since the pension freedom legislation, there’s no longer a requirement to buy an annuity. This means you can now consider other options. However, more options sadly mean more risks. The biggest pearl of wisdom I can pass on to you is to bear in mind that there will be temptation to borrow now and pay back later, but remember, your pension needs to support you for the rest of your life.

Review, review and review

I do experience many young vets leaving university and arranging a pension immediately. Hats off to them - the sooner you start to save the better.

But what I do then also see is that pension just sitting in the background ticking along. It’s very rarely looked at, reviewed or monitored. You should be looking at your pension on a regular basis to review where funds are invested and understand what they are likely to do with you in the future.

Next steps

With full-on schedules, anyone working in the veterinary profession may find it difficult to find the time to read up on pensions and what it means for you. I understand that the complete freedom of choice might be overwhelming for most people. Particularly those who don’t spend as much time looking at spreadsheets, graphs and indexes as I do.

Pensions are complicated and perhaps even a little daunting, so you may choose to seek independent financial advice. That’s where we come in. You can benefit from our 15 years’ experience in advising BVA members.

If you’d like to discuss your retirement options, call us on 01823 250750 and a member of our team will be happy to help.

Daniel James

Written by Daniel James

DipPFS

Daniel James is Director of Client Services at Lloyd & Whyte, who are the appointed independent financial advisers of the BVA. Daniel has been working in the financial services industry for 20 years and advising BVA members on their finances for the past 15 years.