Give up the daily coffee and retire a year early
…was the option I presented to my client when discussing the first iteration of their financial plan. They were coming to the realisation that they would have to save more or retire later if they were to achieve their desired standard of living in retirement.
Part of an adviser’s job during the financial planning process is to make the client aware of the impact financial decisions taken today have on their future self. If the client chose not to have that daily caffeine shot and instead invested it into their pension (assuming that was the best option as agreed by the client and adviser), they could take advantage of the following to achieve financial freedom that much earlier.
- Tax relief on pension contributions: The client is a well-paid city worker and had capacity (both in terms of how much they were allowed to save each year tax free and growth of pension relative to lifetime limits) to contribute additional amounts – each £55 that is costs my client is ends up being £100 invested.
- Tax free growth: Any growth will be free of taxes meaning compound gains (the eighth wonder of the world!) will be optimised.
- 25% of the portfolio can be taken as tax free cash at retirement with the remainder taxed as normal income. With careful planning the client can ensure they are optimising their income from a taxation point of view.
The first projection of the financial plan used zero inflation and zero investment growth as it was purely intended to show the effect that small changes in daily behaviour can have on long term outcomes. It forecast the client having the option of being able to walk into their boss’s office a year early and hand their notice in! A year doesn’t sound a great deal to someone in their 40s, but to that same person in their 60s the option to stop working may be their top priority.
The second projection incorporated 3% (net of inflation) growth, and brought their option to retire forward another 6 months.
It will be interesting to see which version of my client wins out; the one now or the one 25 years into the future.
The above example does not take into account future changes in taxation law. Growth of the portfolio is not guaranteed and projections are based on individual circumstances given their unique risk appetite, investment horizon and investment preferences. This article is purely for information purposes and does not constitute individual advice. For advice on what is suitable please contact a financial adviser who will be able to provide advice based on your individual needs and circumstances.