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Recycling – Pensions Advice Wales

Tax advice of the week: Pension recycling Aug 14, 2009
This article was taken from money week, and is something that I am taking up myself.

If you turn 50 by 5 April 2010, you can take a tax-free lump sum from your personal pension (now known as a ‘commencement payment’ or CP) of up to 25% of your fund, says Tax Tips & Advice. Miss the deadline for doing so, however, and the latest rule change means you’ll be waiting until you’re at least 55.

Another point to watch is that if you limit your CP to £17,500, you can reinvest it straight into another pension fund and claim up to £9,750 in tax relief in a move known as ‘pension recycling’.

HMRC has introduced “very wide ranging anti-avoidance rules” to put a stop to the practice for very large sums. However, you can still use a big “get out” which the taxman “doesn’t make much noise about”. That’s where the CP is less than 1% of the pension’s Lifetime Allowance (LTA) – currently £1.75m – hence the £17,500 limit.

Again, carrying on with the theme, this is the next article in the series. For further independent advice go to http://pensionsadvicewales.co.uk/site/

Retirement Planning in Your 50s

If there is ever a critical time for retirement planning it’s when you hit your 50s. You’ve still got ten to fifteen years left in the workplace and you’re entering your peak earning years.

With many of your larger expenses hopefully behind you, or winding down, it’s time to do some serious number crunching and figure out what it’s going to take to live comfortably in retirement.

Final Retirement Planning Opportunity

Your 50s are really your final chance at creating a true retirement plan. Once you hit your 60s, there’s simply not enough time left to make a plan. The good news is that many of your larger expenses such as a mortgage should be nearing their final payments or quite “affordable” by the time you leave your 50s. And research on salaries in the workplace tells us you’re in your peak earning years.

Realistically, there are probably two major groups of retirement planners in this particular age bracket:

•Those of you that are evaluating their retirement plan to see if it is still working. This group really just needs to run through some calculations and figure out if they need to save more aggressively or not.
•Those of you that have held off, for whatever reason, putting together a retirement plan and now want to get one started.
Example Retirement Plans
At this point, we think it’s useful to look at a couple of examples of retirement scenarios that folks in their 50s might find themselves in. In this example, we’re going to look at two different 50 year olds and talk about how well they might be positioned for retirement today.

.We prepared this example using our retirement savings calculator and if you try to replicate these scenarios using that calculator you’ll find some other interesting information. For example, these retirees both expect to be making nearly $128,000 when they reach their retirement age of 65.

They also want to make nearly $90,000 per year in retirement. And to supply that income they are depending on Social Security, a pension plan, and the funds in a retirement plan such as an Individual Retirement Account, 401k plan or 403b. In both scenarios above, each retiree needs to have a little over $300,000 in their retirement account to supplement the income from their pension and Social Security.

The difference in these two examples is the current retirement assets each individual owns – one 55 year old has $125,000 saved, while the other only has $10,000. This retirement savings gap translates into $5,964 in required annual savings for one individual and $21,589 for the other – quite a difference.

Saving for Retirement in Your 50s
The point of this example is to demonstrate the large retirement planning difference that may exist between two 55 year olds. The first individual needs to continue to work their plan by saving nearly $6,000 per year. The second individual needs to make some significant financial sacrifices if they are going to reach their retirement saving goal of nearly $22,000 per year.

By age 50 you should have a very good idea of what it’s going to take for you to live comfortably in retirement. You should also be finishing up paying for large expenses such as weddings, student loans, and paying off your mortgage. The fact that you’re in your peak earning years and your expenses should be declining mean that you can get very aggressive, if necessary, with your annual retirement savings plan.

Retirement Planning Tools
If you’re interested in creating “what-if” retirement scenarios, then you may want to take a close look at some of the retirement planning tools we have to offer, including:

•Retirement Calculators – Here you’ll find several retirement calculators that are designed to help you run through a variety of examples / planning scenarios.
•Investing in Retirement Plans – This publication walks you through a series of questions aimed at helping you to decide where to start or continue your retirement savings.
Most individuals have two options when it comes to retirement savings – IRAs and employee sponsored savings plans such as 401k plans and 403b accounts. This second guide helps you to figure out which retirement account you may want to fund first – if you have the need or the luxury of having a significant amount of disposable income.

Retirement Planning Strategies in Your 50s
This is actually the fourth publication in this retirement planning series. Our third publication – Retirement Planning in Your 40s detailed a very methodical approach to creating a retirement plan. That particular approach relied on the practice of using Plan, Do, Check, Act to create and monitor the progress of a particular plan.

If you’re interested in learning how to put a retirement plan together, you may want to take a look at that article. Listed below are some of the more important steps and specific activities that a 50-something should consider when planning for retirement.

Consolidating Retirement Plans
If you’ve worked for several employers through the years and you’ve got a number of “smaller” plans with each employer, it might be time to consolidate your retirement plans. The benefit of consolidating plans is that it allows you to gain a better picture of what’s happening with your total retirement portfolio and makes managing the portfolio itself much easier.

Whether it’s an IRA, or a 401k plan, it’s a fairly common request to transfer one retirement account into another. Your plan administrators should be able to supply you up with all the required paperwork. Be careful about taking personal ownership of the money or it could be viewed by the IRS as an early withdrawal.

Take a look at our article on 401k Rollovers or 403b Rollovers for some helpful hints that will keep steer clear of early withdrawal penalties that can be imposed by the tax code.

Balancing the Risk and Rewards of Investments
At this point in your life, the ideal retirement account should be a mix of stocks, bonds and shorter-term cash investments such as CDs. Make sure you’re comfortable with the risk and rewards of each investment type. Generally, it is advisable to move money into “safer” investments the closer you get to the point in time when you actually need to use the money.

For example, you don’t want all your money in highly volatile growth stocks in the same year you anticipate needing the money for income. You don’t want to have to close out a position in a stock when it’s in the middle of a downswing.

Balancing a Portfolio
Once you’ve decided on the mix of stocks and bonds in your retirement portfolio, make sure you are looking at the percentage allocated to each type of investment at least once a year. As each asset class appreciates or declines in value, you may find it necessary to redirect future investments or rebalance your portfolio between asset classes.

50 Year Olds Playing Catch Up
Finally, if you find yourself in the situation where you need to play catch up with your retirement savings, keep in mind that the IRS has some catch-up limits that apply to individuals 50 and older:

•401k Plans – In 2009 and 2010, you can contribute up to $22,000 to a 401k plan – which includes a $5,500 catch-up limit. For more information on future limits, including those for 2011, take a look at our publication on 401k contribution limits.
•IRA (including Traditional IRAs and Roth IRAs) – In 2009 and 2010, you can contribute up to $6,000 – which includes a catch-up limit of $1,000 – to a traditional or Roth IRA. Once again, we also have information for 2011 in our articles on IRA Contribution Limits and Roth IRA Contribution Limits.
Finally, make sure you stay informed of the retirement planning options your company offers. Many companies are beginning to offer Roth 403b plans and Roth 401k plans that provide employees planning for retirement with the combined benefits of each of these plans.

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About the Author – Retirement Planning in Your 50s

Copyright © 2006 – 2009 Money-Zine.com

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Retirement Resources on the Web

Carrying on with the theme, this is the next article that I found on this subject, and it makes interesting reading. For further independent advice go to http://pensionsadvicewales.co.uk/site/

Retirement Planning in Your 40s

If you started your retirement planning early in your career, then you should be in pretty good shape by the time you’re in your 40s. If you’re thinking about retirement planning for the first time, then you’ve got some serious catching-up to do. That being said, retirement planning in your 40s is perhaps the single most important step you can take to prepare yourself for those retirement years.

Retirement Planning Opportunities

We’re going to use an analogy from the game of football. Let’s face it; working in your 40s is like halftime in a football game. Your career is about half over and it’s time to stop the game, assess where you are, and rethink your opportunities and plans.

You’ve got twenty years of work behind you and roughly twenty years of work ahead. If you haven’t been saving for retirement, it’s time to get started. If you’ve been socking money away for years, it’s a good time to reassess where you are and what you need to do over the next twenty years.

Time and Retirement Planning

Since you’re at the half way point, we’re going to make a couple of comparisons using our retirement savings calculator so that you can see some of the different scenarios you might be faced with in the future and right now.

For example, we are going to illustrate what the retirement plans might look like for a 45 year old that had been saving through the years versus one that is just starting to save for retirement. We’re also going to demonstrate what happens if you decide to wait another ten years before setting money aside for those retirement days.

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So in this particular example, a 45 year-old that has already saved $75,000 needs to save about $5,300 annually to meet their desired income replacement rate of 70% when retired. But a 45 year-old that has a minimal amount of retirement savings needs to save at more than double that rate – nearly $12,000 per year.

More importantly, if that same 45 year-old waits until age 55 to start saving for retirement, then they need to set aside over $18,000 a year! Saving that much money each year will truly present that individual with a lifestyle challenge. That’s roughly 20% of their pre-tax income that needs to be set aside each year until the day they retire.

Saving for Retirement in Your 40s

We strongly suggest that you run through some retirement scenarios yourself using our retirement calculators. In our example above, we’re counting on Social Security and a pension plan to help close the retirement income gap. Those assumptions may not be true in your situation.

Once you’ve figured out exactly how much you need to save each year, then your next stop should be our retirement investing guide. That publication walks you through a series of questions aimed at helping you to decide where to start, or continue, your retirement savings. Most of us have two options when it comes to retirement savings – IRAs, and employee sponsored savings plans such as 401k plans and 403b accounts.

Employee Sponsored Retirement Savings Plans

Usually, your first recommended course of action will be to start funding a 401k plan or 403b especially if your employer offers such a plan and they are matching your contributions. So depending on how much you’ve got saved, whether or not your employer offers a 401k plan and the generosity of the plan itself, this type of account is usually your best bet – especially if you’re playing catch up.

Individual Retirement Accounts

Now depending on what your employer is offering you, and how much you need to save each year, you may find yourself supplementing your employer’s 401k plan with an individual retirement account.

For example, let’s continue with our scenario above of a 45 year-old with minimal retirement savings. If their employer matched 50% of their first 8% in contributions to a 401k plan, then they’d be saving $9,600 via that plan. But they’ve still got a $2,000 savings gap, and at this point their next best option might be a Roth IRA.

The point here is you really need to look at our guide and run through some scenarios to see what the numbers are telling you.

Retirement Planning Strategies in Your 40s

If you’ve been thinking about retiring, planning and saving all along, then you may find yourself on autopilot by the time you reach your 40s. Holding the course and working your original retirement plan might be all you need to do at this point – especially if your original assumptions were accurate.

If you’ve been ignoring retirement for some reason or simply delayed facing the reality that you may one day be retired, now is the time to act. It’s halftime. It’s time to regroup and prepare yourself for the second half of your career. As mentioned in our article on retirement planning in your 30s, the plan, do, check, act approach works best in creating a retirement strategy:

•Plan – At this point in your career, you should have an excellent feel for when you’d like to retire, how much you need in those retirement years and where your current career is likely to take you. For that reason, you should be able to create a very accurate retirement plan.
•Do – At 40-something there is simply no time to waste. Once you’ve figured out what you need to do, then just do it.
•Check – If you’re playing catch up, then you’re going to need to check your retirement plan every two years or so. Because of the relatively short time between now and when you retire, you need to pay close attention to things such as the return on your investments to make sure they agree with your planning assumptions.
•Act – As you check your plan, you may need to make adjustments to things such as retirement age and your rate of savings. Since you’ve got half your career behind you, at this point you should only be tweaking your retirement plan during each of these cycles.

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About the Author – Retirement Planning in Your 40s

Copyright © 2006 – 2007 Money-Zine.com

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Retirement Resources on the Web

Financial Advice in your 30s

This is a follow up article to last weeks article about planning in your 20s, that I found whilst researching for articles for this blog….hope you find it useful. For further independent advice go to http://pensionsadvicewales.co.uk/site/

Financial Planning In Your 30’s

The age range between 30-40 is significant time in relation to financial planning given that it is during this time that many financial decisions will directly effect retirement plans and long term financial matters, all of which will effect future prosperity.

Pension Planning

If you haven’t yet had opportunity to start saving towards a pension this is a critical time because failure to do so before you reach 40 will almost definitely mean that you will have insufficient time before retirement to build up a decent level of pension contributions to ensure a comfortable lifestyle.

Where possible join a corporate or government related pension plan as these employers often contribute additional amounts to whatever you can afford to save. So for instance if you put 4% of your wages/salary a month into a pension plan they will likely match it.

These schemes are often referred to as final salary schemes, as the pension provider promises to pay you a pension based upon your final salary before leaving the organisation and the level of financial contributions made to the plan. So the sooner you can start saving in your 30’s the more pension contributions you will have built up by retirement and the greater your final pension pay out.

Property Investment

If you have not yet been able to purchase your own property, your 30’s are a good time to get into the market. The benefit those in their thirties have over those looking to buy in their 20’s, is that you may already have 10 years worth of savings from employment which can be used to place a larger deposit on the perfect property. This often reduces the size of the monthly repayment levels and the total amount of interest you will have to pay in the long term. Whilst the decision to own a property is down to personal choice it is advisable, as property usually gains in value and is therefore a long term investment In the future you may be able to sell your property and downsize leaving you with a healthy profit with which to improve your retirement.

Delaying a decision until you reach 40 means that your may be unable to retire early in the future due to ongoing mortgage repayments into your 60’s or even 70’s. In addition insurance payments that you take out for the duration of your mortgage term to protect against critical illness or disability and life insurance or income protection will be cheaper than they would be at 40 because of your age.

Life Insurance

Life insurance gets more expensive the older you get because the risk of death increases with age. If you have not yet thought about life insurance consider taking it out now as it will never be cheaper. Whilst no one likes to think about death, it is important to protect loved ones from an excessive financial burden should you die early. Taking out life insurance whilst in your 30’s can save you anywhere between £150 and £300 a year on an average policy.

Compare UK life insurance policies here

Saving for your children’s education

If you have children as you reach your 30’s, planning for their future educational needs is now critical if you intend to give then a good start in life and not place excessive financial burdens on yourself another 5-10 years further along. College and university education can be very expensive. Costing between £15-30,000 per child. Whilst this figure is spread over a period of years it is important that you start thinking about how you will meet this cost now.

Also think carefully about what level of risk you are willing to expose yourself to as you save or invest for your child’s College/University fund. Do you really want to invest in high risk shares where the potential to lose your original investment is significant. Try instead investing in government bonds or placing money on deposit in a high interest savings account.