If I proved beyond doubt that you could afford to shake off the shackles of employment and live your best life without ever working again, would you listen? If you answer “yes”, the chances are you’re already asking the question “why am I still working?”
Over the past few years, many people have been making sense of the new norm by trading city life for country living. So many have been able to work from home and continue to do so. Others cling to the hope of a permanent three-day commute as they negotiate a more satisfying work/life balance. But for anyone with a rich life outside employment, the question still remains: “when can I give up work?”
I’ve met scores of people who could afford to retire but never realised it. Many don’t even know that their retirement lifestyle could be funded from their accumulated wealth. And even if they do know, an employment contract provides a comfort blanket they are loathe to throw off.
The paradigm shift from final salary pensions to money-purchase arrangements has created significant uncertainty in retirement planning. The introduction of pension freedom – which allows unrestricted access to the money-purchase funds – and the current unpopularity of the annuity, have further added to the doubt of giving up a secure employed income.
To decipher the retirement conundrum, you’ll need to understand the income you require. The mistake most make is to equate this income to salary, which is taxed at source. Retirement income can be drawn from many sources. With a little ingenuity, this can be tax-free in some cases.
Income drawn from a pension is a prime example: 25% can be taken tax-free, and the remainder is taxed at the marginal rate. So, if you are a Basic Rate taxpayer (20%) in retirement, the effective tax rate on withdrawals becomes 15%. When the Personal Allowance is factored in, Income Tax on drawings of £40,000 pa is under £3,500 or 8.75%. On £30,000 pa, it is under £2,000 or 6.67%. In addition, there is no National Insurance on pension withdrawals.
Income can also be drawn from other pots (such as ISAs, savings accounts) and further tax allowances will come into play. For instance, in the case of cash/interest, there are allowances which mean up to £6,000 of interest can be tax-free if your total income is under £17,570. For general investments/dividends, there is a £2,000 dividends allowance; after that, Basic Rate taxpayers only pay 7.5% tax on dividend income.
When employed, there is the cost of convenience: holidays taken at peak times, travel costs, Costa breaks, work clothing, convenience shopping, and dog walkers among other things. In retirement, these items fall away to be replaced by an obsession with bargains, such as switching energy suppliers, sales shopping and, as my friend Voucherman Dave knows, two-for-one lunch offers. The net effect is that the income required in retirement is much less than most think they will need. As is the asset base required to support it.
So how much do you need to retire? To get an initial indication, add up your total liquid asset base – pensions, cash, investments, rental properties, and equity that could be released from a property on downsizing – and deduct any debts. Then divide that figure by 100, minus your current age. For example, someone who is 55: (100 - 55 = 45). If the answer is an annual income that allows you to retire surely it’s worth a more detailed look.
The next step is a retirement planning interview. Most of us are interviewed before starting a new job, so why not set up a similar process at the end of a career. This interview could include a complete cashflow analysis, which looks at assets, expenditure, tax, and risk. It could also include an examination of disaster scenarios, such as a market crash. If the interview is successful, it may take a few more years to become fully committed, but at least the retirement process would be underway.
If this article has made you rethink the question: “why am I still working?” why not get in touch with me? Together we can start planning your employment-free life.