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We know not everyone wants to retire early (or even at all) but we do know that most people would like to have the choice of whether to work or not. In a world of rising State Pension Ages and increased taxation, this is becoming more & more difficult for people.
We have therefore come up with our Top 5 Tips to ensure you avoid most of the common pitfalls.
This isn’t rocket science and is probably the most important step to take, yet very few people actually do this! You simply need to work out what level of income you need and when. For example, you may want to be financially free in 10 years time and in order to do this you need passive income of £30,000 per annum.
It doesn’t stop there, however. You need to factor in inflation otherwise you might be disappointed & have a rather uncomfortable retirement. So, in 10 years time, you will need something like £40,000 per annum if inflation runs at 3% between now and then. There is your target!
Once you have your target, you need to work out how best to hit it and the first step is to look at what you have already. The key here will be to know what level of income you can expect from your existing pensions & other investments.
There are people who blindly throw £200 per month into a pension and think they will be OK as “at least they have a pension”. Yet they have no idea what level of income this pension is likely to provide them!
Make a list of all your existing pensions & investments (and your business, if you will keep it into retirement) and work out what income they are likely to provide in your retirement.There are many factors involved in calculating this, such as likely investment returns, taxation, and charges.Wow can help you to do this.
You may be pleasantly surprised – or quite disappointed – but either way, you will have a much better idea of where you currently stand and what you need to do next.
Retirement is not just about pensions – far from it. It is also not just about your business, nor should it be just about property. Had you been relying on a single asset class for your retirement in recent years, you probably would have been very disappointed and are now facing a longer working life than you were planning.
We help our clients to diversify. It is very high risk to rely solely on your business and somewhat churlish to rely on the sale of your main residence – however these things are important in building a diversified portfolio of assets to provide you with an income in retirement.
Once you have your target, and know what assets you have, you need to make sure you are not overly reliant on any single asset. This will significantly improve your chances of retiring early.
Sounds obvious, but many people leak thousands & thousands of pounds to the taxman over their working lives. By ensuring your affairs & investments are structured in the most tax-efficient way, you can bring forward your retirement date by many years.
For example, if your business makes £10,000 in profit and uses this to pay out a dividend, it will pay at least £2,000 in corporation tax, leaving you with £8,000 in your pocket as a dividend. If you are a higher rate tax payer, then you may have an additional tax liability, meaning that you have a further £2,000 of personal tax to pay. This leaves you with only £6,000 out of the original £10,000 profit due to tax.
By making an employer pension contribution of £10,000, instead of taking a dividend, the whole amount will be paid into the pension fund with no corporation tax to pay, as it is an allowable expense. This means you could have personally retained an additional £4,000 by not paying any corporation or personal tax on this money.
Having a target and knowing where you currently stand is great, but if you are to be successful in achieving your retirement goals you need to review your progress every year.
The key questions to address are:
You don’t have to complete these 5 steps on your own – Wow are here to help.