Is there a good time to retire?

Today we speak to Michael from our financial planning team about whether there is a good time to retire. 

When is it a good time to retire?

For basic rate taxpayers there isn’t really a better time to retire because ultimately the chances are that when you do retire you’re likely to still be a basic rate taxpayer. Therefore you will be paying the same rate of tax regardless.

For higher rate taxpayers you could argue that the beginning of the tax year is better because then they will come out with a higher tax band. But if they’ve saved up enough cash reserves to one side and decided to retire part way through the tax year they could use some of the tax reserves that they have to see themselves through the remainder of the tax year. And then ultimately from there they could have a basic rate tax pay from the new tax year. 

The more important part of retirement is to have a strong plan in place, which is what the whole process is ultimately about. Once we have set a client up with a plan, then we will show them how best to achieve what they want to do in terms of retirement. So as long as we are aware of when it is that a client is looking to retire we can plan around it. Therefore a good time to retire, for anyone, is when they want to retire. It’s more about making sure that they are being very open and honest with us, they are giving us a date of when they think they want to retire. And based on tax bandings, we will be able to work out how much they will have earned and then over 6 months of the year will they have knocked into another tax band. 

If they don’t have enough money inbetween the working times to then supplement income into the start of the new tax year, then they can start accessing some of their pensions via drawdown or annuities. Another option would be to release a bit of tax free cash to see them through that period of time. So ultimately the plan is just about putting something in place so that one day they can retire. 

But for a basic rate tax payer it is irrelevant what time of year they retire because chances are they were paying 20% tax as they were working and then when they retire they’re still gonna need to draw both their personal allowance meaning they are still gonna pay 20% tax anyway. 

Do the current markets have an impact on when you can retire?

No it doesn’t. It is important to remember your funds will be invested for the next 20 years to fund your retirement. Over 20-30 years there’s gonna be these big dips and the plans take into account that that will happen, through the stress testing of the plan. So we look at it from a probability of success. If we were to see these big dips in the market, whether it is a pandemic, a banking crash or like the early 2000 when the .com bubble burst, our modelling runs through these scenarios to see if it would still work or would there be a likely problem. 

Now what history has shown us is that the markets have jumped back up. What we don’t know is how quickly or when. But what we do know is that they will return as over the longer term the markets are very predictable. The general chagectary is upwards. Over the short term there is a lot of volatility. But as we start accessing pensions and funds that are being invented we are only accessing a relatively small proportion of what’s actually being invested. 

So a client may have a pot of 300,000 pounds but they may only be drawing out 1,000 pounds a month. That’s a very small fraction when the bulk of the funds are still invested. So when hopefully the growth comes back to the market the pot rebounds with that. 

The market should not have a detrimental impact on clients wanting to retire. From what we have found and clients coming in it has no impact whatsoever 

It is important for clients to stay calm during these periods and not to try and take out as much as they can. Once you have taken cash out you have then locked in that loss. The cash isn’t going to grow back at the same % that the invested funds are. So whilst I can see why clients would think that, it is more important to make sure that we are aware of risks that come with taking cash out. You should only take what you need when you need it. 

What about inflation, will high inflation impact the plans?

The government target for inflation is that it should run at 2%. Historically inflation has been below that but currently we are peaking up to 9-10%. Predictions are that in the short term it will go up a little bit further in October when our NG caps go up. But the prediction is after that it may then ease away. 

So we are fully aware that inflation over the long term will go up and down, very similar to the markets. And we don’t anticipate inflation to be up at 10% for a long period of time. If it does we will adapt our plans accordingly with that. But if we think back through history to when mortgages were being paid off in the late 80s early 90s when inflation and interest rates were up at 9 10 12% and it didn’t last forever. We are in a very similar situation now.

Our stress tests take into consideration these issues and determine whether it is really an issue for you or not. Within our plans we make sure to over inflate certain aspects like holidays a little bit to allow for a bit more reassurance. 

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