Planning for retirement and implementing a strategy that works for you can be spellbinding but can also be disenchanting.
Let us delve into some of the magic that Merlin’s staff can look at implementing for King Arthur and the royal family:
King Arthur is 50 years old and has recently returned to England following a lengthy period of working abroad.
His new role in the UK comes with a £140,000 salary plus 10% total pension contributions (5% employer and 5% employee by relief at source).
King Arthur has a current income requirement of £50,000 net per annum.
King Arthur has a target retirement age of 60 with a target income in retirement of £60,000 net per annum.
King Arthur has no existing pensions or savings.
The position King Arthur would be in at 60 without additional planning would be £181,163 in pension savings from his workplace scheme (assuming a 5% net return per annum) and £314,337 in additional cash-based savings (assuming 0.5% net return per annum). This would sustain King Arthur’s income requirement in retirement for around 7 to 8 years depending on the tax due. Some way short of a sustainable retirement strategy!
An alternative would be to use some of the surplus cash to make personal pension contributions up to the maximum of £40,000 per annum (minus the existing workplace contributions of £14,000 per annum). This would provide a significant boost to his pension savings, while the additional tax relief the contributions would attract would also improve his overall position, some of which is an effective rate of 60% as much of his personal allowance is returned to him. This would leave King Arthur with £517,607 in pension savings and £191,600 in cash-based savings. His retirement income would then be sustainable for 10 to 11 years, again depending on the tax due. Getting better!
If we take this a step further and add venture capital trust investments (VCTs) into the strategy, we can use the additional tax relief they offer (30% of the investment amount) alongside their tax-free dividend steam (typically around 5% per annum – reinvested until the point of retirement) to build on this. Rather than the surplus £18,689 per annum King Arthur has been using to build a cash-based holding, this could result in a VCT portfolio of £237,000 at age 60. This is based on an £18,689 investment in year one and a £24,295 investment in subsequent years by adding the tax relief from the previous year’s subscription. This alone would add a tax-free income of £11,687 per annum in retirement with the additional possibility of capital growth on the VCT portfolio, adding at least another two years to the time that the required income is sustainable.
Of course, the appropriateness of any strategy is dependent on the individual in question, their appetite for investment risk and ongoing reviews would be required throughout both the accrual phase and the drawdown phase to ensure its suitability and efficiency in the face of changes in King Arthur’s circumstances or relevant legislation. However, by improving tax efficiency and reducing exposure to cash, the strategy has added five to six years to the time King Arthur can receive his desired income.
This is still some way short of what would be considered a sustainable retirement strategy but does illustrate the importance of planning and the earlier this is started the better.