PARTNERS IN MANAGING YOUR WEALTH

A Guide to

RETIREMENT PLANNING

2A G U I D E T O R E T I R E M E N T P L A N N I N G

3 Retirement planning guide

4 Retirement - the facts

5 How much will you need in retirement?7 Investing for your retirement

8 What are the pension rules?

10 What about SIPPs?

11 How should you take your pension?

12 Summary

14 St. James’s Place - Partners in managing your wealth

Contents

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Retirement planning guide

Whether retirement is many years away or just round the corner, unless we start planning for retirement now, there is a great danger that we could outlive our savings.

The golden rule is to fi nd out exactly how much you are going to need in retirement - and to start planning for it now.

The stark reality is that the majority of us need to save more. With people living to a greater age, retirement can now last longer than the time we spend working. We all must accumulate more when we are earning to meet the extra costs of living longer. The decisions we make today will dictate the standard of living we will enjoy in retirement.

And beware the cost of delay. The earlier you make a start, the easier it will be to create the retirement lifestyle you want. You need to commit to a plan, and take action.

“It is better to have a permanent income than to be fascinating.” Oscar Wilde

Today, 22% of the UK population is over retirement age - and this fi gure is projected to reach 25% by 2040.*

In 1981, the life expectancy of a 65 year old man was 16 years. A 65 year old man can now expect to live until 87 (22 more years).** So, from a retirement planning viewpoint, it means that someone retiring now will need to have built up retirement funds signifi cantly more than someone retiring in 1981.

The prospect of outliving savings and running out of money in retirement is a daunting one. This could become a harsh reality if there is a lack of proper planning, which is why it is vital to take action now before it is too late to repair the damage.

Sources* Offi ce of National Statistics, Summer 2008.

** The Offi ce for National Statistics and Government Actuary’s

Department; 2006 principal life expectancy projections.

Retirement - the facts

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How much will you need in retirement?

Your life in retirement is likely to be very different from your working one, both personally and fi nancially. You will probably have lower outgoings. Children will most likely have left home, and most of your long-term debts like the mortgage will probably have been cleared.

You do need to take into account, however, that you might want to spend more on leisure activities like holidays, travelling and hobbies. And you may choose semi-retirement, maintaining some level of employment while you are still happy to work.

It is therefore clear that making a calculation for your retirement fund is entirely personal, however below are some examples that may prove instructive.

Let’s assume you are 40 and you want an annual retirement income of £30,000 when you retire at 65. As a rule of thumb you should apply a multiple of 25 to the £30,000, and consequently you are going to need a retirement fund of £750,000 to help achieve the desired level of income in retirement.

When you work out how much income you need in retirement remember to allow for infl ation.

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The longer you leave it to take action, the more expensive it will be to catch up. Take the following example. Assume you start saving for retirement at the age of 40, and invest £500 a month gross of tax relief and increasing each year in line with average earnings.

If you delayed by fi ve years, and started at the age of 45 instead, you would need to invest £783 a month, gross, to achieve the same fund. Delay until the age of 50, and the gross fi gure becomes £1,424 a month.

These fi gures assume contributions are made to a St. James’s Place Retirement Plan, based on projections of 7% annum and are for illustration purposes only. They are examples and are not guaranteed and are not minimum or maximum amounts. What you get back will depend on how your investment grows and the tax treatment of the investment. You could get back more or less than this.

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Investing for your retirement

Pensions have a unique advantage when it comes to investing for your retirement, thanks to the availability of tax relief and the ability to obtain it by contributing up to 100% of your earnings or a maximum of £245,000 - whichever is lower. Personal contributions are payable net of basic rate tax of 20% and relievable against the higher rate of 40%. So if a member pays a contribution of £80,000 net of basic rate tax, the scheme will invest £100,000. Assuming that higher rate relief is available on the whole contribution, the real cost of the contribution will be reduced by a further 20%, or £20,000 in the example, to £60,000. The additional 20% of tax relief is obtained by submitting a self-assessment tax return.

However, individuals with an income above £150,000 in this or either of the previous two tax may only receive higher rate tax relief on contributions of up to the Special Annual Allowance of £20,000 pa. Any contributions paid over £20,000 may be subject to the Special Annual Allowance Charge, which will reduce personal tax relief to 20%. All of the growth in your pension fund is largely free of all UK income and Capital Gains Taxes.

Just to emphasise the advantages of these arrangements, 25% of the fund is then available as a tax free cash sum from age 55, or earlier if taken before April 2010. Stripped down to its tax essentials, this means that for someone with an income of £150,000 or less a pre-tax income from a fund of £75,000 (after tax free cash of £25,000 is extracted) has been provided by a net investment of £35,000 (net cost £60,000 less £25,000 tax free cash).

Please note that the tax treatment of pensions may be subject to change in the future.

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6 April 2006, known as ‘A’ Day, saw the introduction of a single, simple system to replace a number of previously complex regimes. This has made planning for retirement and taking control of your pension so much easier.

The main changes were:

• A lifetime allowance of £1.75m (2009/2010) increasing to £1.8m by 2010. The ‘Lifetime Allowance’ is reviewed every 5 years. HM Revenue and Customs has confi rmed that the level of the ‘Lifetime Allowance’ will remain at £1.8million for tax years 2011/12 to 2015/16. Any fund in excess of this allowance will be taxed at the point when benefi ts are taken, at a rate of 55% on the excess of the fund over the lifetime allowance

• For most people tax relief on personal contributions is only available on 100% of salary with a maximum ‘Annual Allowance’ of £245k per annum (2009/10) increasing to £255k per annum by 2010, although it is possible to contribute in excess of this amount with no tax relief. The ‘Annual Allowance’ is reviewed every 5 years. HM Revenue and Customs has confi rmed that the level of the ‘Annual Allowance’ will remain at £255,000 for tax years 2011/2012 to 2015/16

• The minimum retirement age moves to 55 from 2010

• 25% of your fund can be taken as tax-free cash.

The increased fl exibility around what you can pay affects all of us and gives some individuals a real chance to start funding a decent pension. If, for example, you are 40, and have earnings of £100,000 pa, the most you could previously fund in a personal pension plan was £20,000 pa. Since ‘A’ Day, providing you can afford it, you are able to pay in £100,000.

What are the pension rules?

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One of the other changes that impacts on individuals is the fact that you can take benefi ts from 55 without ceasing employment. This increases the options available to you.

The rules also mean pension contributions can now form a meaningful part of an exit strategy for business owners. While contributions may not exceed the stated allowance in most years, there are no limits (apart from the lifetime allowance and the 100% of salary limit) on how much you can put in during the tax year before you reach retirement.

If you are a company owner planning to sell your business on retirement, you could make a large contribution to your pension fund during the fi nal year. While allowing a decent-sized pension, this will have the added benefi t of reducing the value of the business and hence the Capital Gains Tax on exit.

The options that you can now consider at retirement have increased. You no longer have to purchase an annuity, you can take the tax-free cash and decide not to take an income from your pensions. You do not even need to purchase an annuity when you reach age 75.

Retirement is an extremely important time; it is vital that you consider all of the available options and take professional advice.

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What about SIPPs?

SIPPs, (Self Invested Pension Plans) give a much greater range of investment options than those available through most traditional pension plans. Investment is allowed in a host of areas, including equities, stocks and shares, unit trusts, OEICs, gilts and commercial property.

This fl exibility allows you to spread the risk of products performing badly, and the investment growth is free from all UK personal income and Capital Gains Taxes. But in order to maximise the benefi ts of the wider investment choice on offer, active management is essential.

Find out more about your investment options in our free Guide to Wealth Management.

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The earliest age you can take benefi ts from a pension is currently set at the age of 50, and this will increase to 55 by 2010. The good news is that you do not need to retire to take your benefi ts - you can take part or all of your fund and carry on working, if you wish.

You can take up to 25% of your fund free of tax at any time after you reach the minimum pension age. Before, this meant you usually had to buy an annuity (a product that lets you convert your pension fund into an income for life) with the remaining fund, but under the new rules, this is no longer necessary - you can take your tax-free lump sum and defer receiving any income until age 75. Annuities are taxed as earned income.

How should you take your pension?

Retirement planning presents numerous fresh opportunities and it is never too late to look at your current pension provisions to determine how best to take advantage.

One of the key requirements is to keep making full use of your personal contribution limits. Keep monitoring and reviewing the size of your fund, and review your attitude to risk - and as retirement nears, consider the best way to draw your benefi ts.

Summary

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No one likes to face up to the fact that they are getting older and that retirement is fast approaching. Many people have been trying other ways of generating income for retirement - buy-to-let, downsizing, investments like ISAs - yet it remains clear that not enough people in the UK are putting suffi cient sums away to have an adequate retirement income.

Over the past few years, pension planning has not been at the forefront of everybody’s minds particularly with changing market conditions and the introduction of stakeholder pensions.

The arrival of ‘A’ Day and the radical changes it has brought to the system has moved pensions to the top of the agenda and created fresh awareness. If you have not sought professional advice beforehand, it is essential you do so now.

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St. James’s Place Wealth Management is a leading company in the expanding wealth management market. We are a FTSE 250 business with funds under management of over £15 bn.

We specialise in meeting the fi nancial needs of people who have created signifi cant capital, or who earn higher incomes, and whose circumstances are therefore more complicated than most.

We put our clients fi rst

Our advisers, members of the St. James’s Place Partnership, build relationships with clients that last. All our advice is face-to-face and focused on the personal needs of each individual client as we recognise that no one client’s objectives or circumstances are the same as another. This approach, combined with the average of 17 years’ experience of our advisers, ensures the relationships we build are founded on trust.

Partners in managing your wealth

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Focused on protecting and growing our clients’ investments

We do not employ in-house fund managers because we believe that no single fund management house has a monopoly of investment expertise. We therefore carefully select a number of external managers to manage our range of funds.

The cornerstone of this approach is the Investment Committee who ‘manage the fund managers’ on behalf of our clients. We retain an independent investment consulting fi rm, Stamford Associates, who play a crucial role in selection and management. Stamford’s only business is in advising large pensions funds - and us - on the selection of fund managers. This approach gives us both the fl exibility to respond to market conditions as they change and also the certainty that we are employing the best fund managers for our clients.

In other areas such as pensions, life assurance, trust and estate planning, we have carefully selected products and services from other providers, which we believe represent the ‘best of breed’ in their respective categories.

SJP2314P-VR5 (06/09)

Members of the St. James’s Place Wealth Management Group are authorised and regulated by the Financial Services Authority.The St. James’s Place Partnership and the title ‘Partner’ are the marketing terms used to describe St. James’s Place representatives.

St. James’s Place Wealth Management plc: Registered Offi ce St. James’s Place House, Dollar Street, Cirencester, Gloucestershire GL7 2AQ, United KingdomRegistered in England Number 2628062

visit www.sjp.co.uk

All information correct as at July 2009

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