"When it comes to pensions I would always advise couples to bear in mind the advice they get on a plane from an air steward during the safety talk: parents should put on their own lifejacket before taking care of anyone else," says Bernard Walsh, head of pensions and investments at Bank of Ireland Investment Markets.
In other words, for individuals or couples who would like to take care of family in retirement, they should look after themselves with the pension savings they have made over their career, then consider the next generation, he says.
“It is important to get an understanding of what you have, how you might like to spend it in retirement, and to get some expert advice on how to structure your plan and put it in place,” Walsh says.
“Hopefully your mortgage has been paid off and you might be debt-free. You no longer have to pay to commute to work or dress for the privilege. Hopefully your children are no longer financially dependent on you. If you have been paying into a pension plan, you can now stop and enjoy the proceeds. In some ways, you will spend less but you might like to travel more or spend more time on leisure. Your retirement plans should be as individual as you are,” he says.
The good news is that the rules have changed to allow retirees some choice on how they draw down their benefits.
“At its most basic, you can choose to take your pension as tax-free cash, an income for life or as an investment fund. In fact, you can choose a combination of them or all three. The important lesson is that your pension money when you are saving should be invested to reflect how and when you will draw down your benefits,” he says.
‘Diversified’
“We suggest that you invest in a diversified manner. It is also important to consider if your money should be managed in a less risky manner as you near your retirement age. Many advisors recommend that you use a ‘lifestyle strategy’ that de-risks by switching from higher-risk assets such as shares and property to lower-risk bonds and cash as you near retirement. This makes sense if you plan on drawing down your benefits as a fixed income, and maybe less so if you plan on going down the investment or Approved Retirement Fund (ARF) route,” Walsh says.
The majority of our clients will then opt to transfer the balance into an Approved Retirement Fund
One of the advantages of the income choice is that there is a guaranteed monthly pay-out that continues until the person dies and until a surviving spouse passes away. However, at that point the pension ceases. If on the other hand, the money is in an investment or ARF, they can draw income as they wish, subject to tax where required for as long as the money lasts. When the person dies, the remaining fund becomes part of the estate like any other asset. This can be a useful benefit when families are looking at estate planning strategies.
On retirement, clients will typically take a lump sum of 25 per cent from their pension, some or all of which will be tax-free, says Barry Kennelly, director of Davy private clients.
“The majority of our clients will then opt to transfer the balance into an Approved Retirement Fund with an Approved Minimum Retirement Fund (AMRF) if necessary. This is an alternative to an annuity.”
From an estate planning perspective, an ARF is preferable to an annuity, because an annuity generally ceases on the death of the annuitant.
“On the death of the ARF holder, the ARF can pass tax-free to an ARF in the name of the surviving spouse. The ARF can pass to a child, which will be subject to a special 30 per cent income tax and exempt from Capital Acquisitions Tax (CAT) when a child over 21 inherits and subject to Capital Acquisitions Tax (CAT) when inherited by a child under 21,” says Kennelly.
Divvy up
How individuals divvy up the pot is very much dependent on the client. For some retirees, making sure that children are educated and get some assistance purchasing a home are the main issues. The issues become more complicated where there is more wealth, and a deeper discussion is warranted.
“Some clients want to provide for the next generations whilst they are alive. They want to see their children or grandchildren enjoy their wealth. Other clients are very comfortable that assets will only pass under their will.
We are living longer in retirement so you must ensure your assets will be there for your needs
“Separating what is needed for the client’s life and then what is an excess of this, and thus in principle available for the next generation, is a critical aspect of what we do through financial planning. Only then can you really have a discussion about legacy. The figure that each client strives to achieve at this financial milestone is unique and is personal to them,” Kennelly says.
Looking after family is important, but the individual looking after themselves first must be the priority, says Brian Kingston, retirement and financial planning manager at Brewin Dolphin.
“We are living longer in retirement so you must ensure your assets will be there for your needs, rather than passing them on to family today.
“Our retirement years can be expensive. Hopefully, you will be enjoying all the things you wanted to do and deserve to do, but at the same time looking after health or providing for care is more expensive in our retirement years. You do not know how long you will live so you cannot know how many years you need your assets to last before passing them on,” he says.
Planning is important. Making a will and then reviewing and amending as circumstances change is vital. A will makes intentions clear and helps to avoid any family disagreements.
“Involve your family in this process. If your intention is to pass assets on, then involving them is a great way to ensure everyone understands what to expect. Educating future generations is a great way of protecting and growing wealth into the future and this is something we promote at Brewin Dolphin,” he concludes.