Planning is key to making most for retirement pot

Published on Friday 2 January 2009 22:15

WHAT'S the difference between pensions and retirement planning? For most people they are one and the same thing – but there's more than one way to skin the retirement funding cat.

"People often talk about pension planning as if it's the only way to plan for retirement," said Jason Betteridge, an independent financial adviser and associate with www.financialadvice.co.uk. "But there's a whole lot more to building up retirement funds than that and, as the minimum age anyone can access their company or personal pension increases from 50 to 55 in April 2010, there's potential to also consider other additional, less restrictive options."

The most important step is to look at your existing pension, look at what your funds are invested in and, above all, look at the bigger picture.

Retirement planning is all about cash-flow management and, the regular bills aside, paying off the mortgage before retirement is probably the single biggest consideration.

Of the 2.9 million Britons who have interest-only mortgages, about 45 per cent have no means of paying off the capital. Most worrying, many of them will be reaching retirement now or relatively soon.

Individual savings accounts (Isas) can play a big role in building up retirement funds. With an Isa, a tax-free lump sum can be taken out at retirement or money can be drawn out in smaller amounts on an ad-hoc basis. A maximum of 7,200 can be paid into an ISA each year, up to 3,600 in cash and the remaining in shares or the full 7,200 in shares.

But the absence of tax charges means money in Isas can grow surprisingly effectively over time. Those who have contributed the full allowance since Isas were introduced in 1999 could have tucked away more than 70,000 in shares or cash plus shares.

Brian Walker, 45, from Dunbar, has set up four individual Isas over the past four years with a total investment of 28,200, paid in monthly, and he also has a small company pension.

"I'll lift the money out of my Isas when I'm 50 and that will pay off some of the capital that's left on my mortgage," he said . "I know I won't get my hands on my pension for another ten years, so I'm glad I've made other plans."

If the annual Isa allowance has been used, unit trusts, open ended investment companies and investment trusts could also be set up to create additional retirement funds. Ideally, like most investments, they are designed to be long term, at least five years or more.

Buying shares directly in companies is another option and profits can be made via a dividend if the companies do well. But remember that past performance doesn't guarantee future profits.

This is where financial advice comes in. A good adviser can help you to understand your attitude to risk so that you won't end up investing in high-risk investment activities that could cause sleepless nights.

An adviser will also make sure that your pension is invested in the right funds.

&#149 Jill Blake is director of communications at www.financialadvice.co.uk

TOP TIPS

1 From 2010, you will not be able to withdraw funds from your pension until you reach the age of 55.

2 Individual retirement needs vary enormously so seek advice, as there is no one-size-fits-all solution

3 Talk to an adviser about the potential risks you might take with investments

4 Cash flow management is the key – think about your long-term mortgage plans, if applicable, and consider the household bills and budget.

5 Do not give into temptation by dipping into your funds early – you might regret it when you come to realise your retirement savings.