A recent study by the Resolution Foundation has found that Millennials will have similar retirement incomes to today’s baby boomers. As one of the older batch of Millennials, I must admit I found this research surprising as I have always been quite pessimistic about the retirement income for the current batch of 20 and 30 somethings.
This belief has been fuelled by the dramatic changes in pensions and disappearance of final salary schemes, the difficulty of getting on the property ladder given the high price growth over the last few decades and the poor returns for saving, to name a few.
So if the Resolution Foundation is to be believed what steps should Millennials be taking now to plan for retirement?
A lot of ‘baby boomers’ I advise on tax and succession planning have substantial pensions and pension income. Many of the products and tax reliefs are less generous nowadays, with the lifetime pension now standing at £1 million as opposed to no pension allowance before 2006 and a total of £1.8 million in 2010.
Also, the annual allowance for pension contributions, while still receiving tax relief, is capped at £40,000. This, again, has reduced over the years.
However, it is possible to use unused allowances. Also, if you start contributing early enough you can build up a decent pot which can grow tax free. The government have also made it mandatory for employers to give employees pensions with the minimum contribution rising to 8 per cent from 6th April 2019 (3 per cent from employer and 5 per cent from employee).
It is also important to discuss with parents how their pension can be used on their death, if there is lump sum pension payable. There are tax efficient ways this money can benefit their children or grandchildren and assist in retirement.
Overall, it is important to get the proper advice from financial experts.
This may seem like the obvious step but it is often the hardest to achieve when you are looking to set up a home and start a family. Regular payments into ISAs, which can amount to £20,000 per year per person, will see tax free income and capital gains for your retirement.
This is effectively proactive savings, which sees the money being invested to create income and a gain. Technology has enabled this to be done by yourself or through financial advisors or stockbrokers. Clearly there can be a downside to investing and it is important to seek professional advice.
When advising families, one of the biggest costs when people are approaching retirement is their children and assisting them with their education, living costs and getting on the property ladder. When advising clients who are in their 30s and 40s with young children, I often recommend they should start gifting and passing assets down to their children. By doing this you are able to build up a sizeable pot and/or income for them and allow them to be less financially reliant in years to come. It also mitigates against future taxes.
Many of my clients use Junior ISAs, which can see £4,128 a year put aside for their children. They also set up bare or discretionary trusts for them to ring fence funds for future use. This allows them to retain control but pass assets down a generation.
Generations of young people have ended up heavily relying on inheritances from their parents to financially survive in their retirement. I act in the administration of a number of estates where the final pay out to the beneficiaries represents the single biggest pay out they will ever receive. However, in the age of high care costs, extended life expectancy and 40 per cent inheritance tax, such inheritances should not be relied upon.
However, I am a strong believer that sensible gifting, either absolutely or through trusts, to Millennials should be carried out by parents if they can afford it. This can mitigate inheritance tax, help children when they most need it and help them save for retirement.
I often advise clients to investigate insurance for critical illness and death. This may sound particularly morbid but by insuring against any tragic illness or accident over your working life, you lessen the possibility of you or your family struggling in retirement.
Like a lot of things in life, there is no magic wand. What is important in retirement is to be prepared, and this preparation should be happening now, not on the eve of your retirement.
James Ward is head of private wealth at Seddons.
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