For higher earners, retirement planning means looking at more than just pensions. Here are some key points to consider.
Common wisdom suggests that high earners have little to worry about when it comes to retirement planning. In fact, this is a long way from the truth. No matter a person’s net worth – whether they are a corporate executive, a business owner or beyond – careful planning is required to ensure that risks are mitigated and objectives are achieved. This is particularly important given that many people want to maintain the same lifestyle in retirement as in their working life. In fact, income needs often rise during the early years of retirement given that many people go on holiday while they are still physically active. A proper plan will help to ensure the right arrangements are in place to fund a desired lifestyle and also to cover any unexpected expenses along the way.
Mark Hassett, head of the corporate executives team at RBC Wealth Management in London, says that retirement planning for clients with high earnings has a simple premise: “It is about structuring your assets so that they pay for the lifestyle you want,” he says. However, the process is not always so simple. This is because higher earners not only have more complex compensation arrangements, but given many of them are internationally mobile and might have assets spanning more than one jurisdiction, they will also have more complex wealth planning needs.
First determine if you have a pensions issue
One of the biggest myths about retirement planning is that any conversation on the topic means talking about pensions, Hassett says. Higher earners tend to have several compensation arrangements depending on their specific circumstances, consisting of a salary and bonus package, additional benefits such as onshore and offshore pension plans, share schemes, complex deferred compensation schemes, as well as life insurance and medical plans. Of all these, pensions are frequently a small component. But this does not mean they are not important. Given that the UK government has introduced lower annual and lifetime contribution limits for pensions in recent years, higher earners need to be aware of these thresholds and their implications based on their personal circumstances. These lower thresholds also mean they are increasingly turning to other investment vehicles for their retirement savings.
Dion Lindskog, head of wealth structuring at RBC Wealth Management in London, says many high earners do not realise they have a pensions problem. “Many people are financially well off and don’t need their pension benefits, therefore they think they don’t have to worry about it. But what they don’t think about is that they can use them to help their family,” he says. With that in mind, Lindskog says that by conducting a thorough review of a client’s financial situation, any potential pension problems can be highlighted and then solved.
Make use of all your options
Hassett says that retirement planning means taking a holistic view of a client’s financial affairs to see if it is possible to anticipate any future problems, such as succession issues, and how they can be solved. This consists of considering three key questions:
Will my assets provide me with the net income that I need to provide the lifestyle I desire?
Do I need to take an unacceptable level of investment risk to maintain my lifestyle?
How can I pass my residual assets to my chosen beneficiaries efficiently on my death?
When it comes to creating a plan for a client’s life in retirement, Lindskog likens this to orienteering; first starting with looking at where they are in their life right now, where they want to be when they stop working, and then determining if they will be making any essential or desired stops along the way. The outcome of this will be a financial plan that is customised for the client’s specific needs. Regardless of circumstances, everyone should try to take full advantage of the available wrappers and allowances available to them, Lindskog says, starting with pensions and ISAs. As a next step, depending on circumstances and attitude to risk, clients might want to consider enterprise investment schemes, venture capital trusts, offshore bonds and property investments.
Even if you are a high earner, using all of the available allowances and reliefs is not only shrewd, but can make a big difference over time. Spreading wealth across a range of different savings vehicles also has its benefits. This provides a degree of diversification, but the real benefit is that each one can be accessed at a different point in time to provide income when needed. When it comes to retirement income, “it’s about knowing which taps to open and when,” Lindskog says.
Include your family in your retirement plan
Another often overlooked option for married clients is the spouse’s pension. It may be that both spouses contribute to their pensions, but if one of them either doesn’t work or doesn’t have a pension, this is a missed opportunity. “All too often we find that the spouse doesn’t have a pension,” Lindskog says. “What they’re missing here is that anyone can contribute to another person’s pension plan up to the £40,000 annual limit.”
Making use of all of the family’s allowances and reliefs can make a big difference in the long run. Frequently, most or even all family wealth is in one spouse’s name. In such a case, making a pension contribution for the spouse has its advantages. While the tax relief in this arrangement will go to the person who holds the pension rather than the person making the contributions, it is still more efficient. Another avenue to consider is opening pension accounts for children, which in certain circumstances might be favourable to Junior ISAs because the money can’t be withdrawn until age 55. This can also be an attractive way to pass wealth down the generations without the danger of it being used unwisely when the children are young.
Solve any over-concentration problems
An often overlooked aspect of retirement planning is the question of how much wealth a corporate executive might have tied up in the company share scheme. This is one reason why Lindskog emphasises the importance of looking at every source of a client’s wealth. “If you’re in a share scheme, no matter how good your employer might be, you have a concentration risk,” Lindskog says. Therefore, depending on how much wealth is held in a single company’s shares, it might be necessary to seek additional diversification to act as a buffer in the event that the company share price falls.
Planning for life after work is not simply about covering living and leisure costs. For many people, it also means leaving a legacy, perhaps to the next generation and perhaps to a charity. Lindskog says that this is an important factor that needs to be considered. “The reality is that clients of this type often have more than enough money to fund retirement, so the real question they face is what they want to pass to their children and what their attitude might be to charities or philanthropic causes,” he says. This includes structuring a client’s wealth in preparation for leaving it to the next generation as well as arranging for gifts and donations to be made during their lifetime and upon their death.
In these ways retirement planning, even for the wealthy, can reap rewards: no one can put a price on the peace of mind that comes from knowing that you and your heirs are well provided for and that your legacy lives on.
HOW MUCH IS ENOUGH? SIX STEPS TO BUILDING THE PERFECT RETIREMENT PLAN
Everyone wants to live comfortably when they retire. Here are six steps you can take to ensure you have enough money to make that dream a reality.
There is rarely a straightforward answer to the question of “How much money do I need to retire comfortably?" Everyone's retirement needs are different and can change over time.
The good news is there are clear steps you can take to set yourself up for a financially stable retirement.
For high-net-worth individuals (HNWIs) looking to maintain a high standard of living after they stop working, it's vital to take an in-depth look at their full retirement picture.
“Many of our clients are used to receiving a significant income every year and are often able to spend money without thinking too deeply about it," says Lucy Day, associate director, Relationship Management for RBC Wealth Management in the British Isles. “When we tell them how much they might need to grow their savings pot in order to continue that lifestyle throughout retirement, it can come as a shock."
For example, RBC Wealth Management calculates that someone who is looking to fund a 30-year retirement, spending £250,000 a year, with inflation at 3 percent, could require up to £11.9 million in their retirement "pot." Now that's the extreme scenario based on a 0-percent rate of return. If applying a 5-percent rate of return (net fees and taxes), the required amount falls to £5.8 million.
While these are only illustrations, at the very least they show that a consistent return on investment (albeit, requiring a higher level of risk) significantly reduces the level of capital needed. They also reinforce how critical it is to have appropriate planning in place – and to start the process as early as possible.
So, how exactly can you calculate the total you'll need to fund the retirement you want? Here we look at six key steps that can get you on the road to realising your goals.
1. Determine what you expect your expenditure to be
In order to calculate the size of your retirement pot, you need to have a reasonable idea of how much you want to spend each year. And this means carefully scrutinising – and questioning – your anticipated spending.
“We typically look at a client's level of expenditure and explore how they expect that to change, either up or down," explains Day. “A lot of factors can come into play. They may be paying a huge amount in school or university fees right now, for instance, but that will tail off at some point. After that, they may plan to buy property for their children or pay their grandchildren's school fees."
How people choose to spend their retirement years will also have an impact. Some may wish to travel the world extensively, which could involve significant spending on holidays over a period of 10 or 20 years. Whereas others may want to live more simply and enjoy hobbies closer to home.
“It's also not uncommon for clients to focus on retaining the value of their assets for the next generation," says Day. “So while they want to be able to live comfortably, they don't want to considerably reduce the net value of their estate because they want to be able to pass that on."
By examining what you currently spend and how you expect to live in retirement, you can begin to understand the amount of income you'll require.
2. Factor in contingencies
If there's one phrase befitting of planning for retirement, it's "expect the unexpected." It's therefore important to look at certain contingencies and factor those into your calculations.
For instance, your family circumstances may change – more grandchildren than expected may come along or a child may wish to relocate abroad. On the other hand, you or someone in your family may need long-term health care. There may also be external factors, such as market volatility or rising inflation – both of which can erode the value of your investments or savings.
“Because we are considering unpredictable things here, it's not an exact science," says Nick Ritchie, senior director, Wealth Planning for RBC Wealth Management in the British Isles. “This is where scenario planning and cashflow modelling play a really important role."
3. Calculate the size of your required retirement pot using cash flow modelling
According to Ritchie, it's vital to look at several scenarios based on your anticipated expenditure. “We tend to show clients a couple of scenarios," he explains. “So, we'd say, 'This is your spending requirement – and this is how much you would need in your retirement pot in order to sustain that requirement over a typical lifetime. And here's how that varies depending on different rates of inflation, life expectancies and rates of return,' this can then inform the level of risk someone is willing to take in pursuit of their retirement pot."
Those willing to take lower levels of risk will typically have to put more aside during their working life to achieve their retirement goals. But what this type of cash flow modelling does is show a range of options that essentially cover best- and worst-case scenarios. "It gives you a much better sense of the number you'll need for the long term. It will never be exactly right, but it makes the often intangible concept of 'how much is enough,' become far more real" says Ritchie.
4. Put a retirement plan into action
Looking at these scenarios can be a relief for some people, as they may learn they are closer than expected to their required amount. For others, however, it may come as a wake-up call that they need to take decisive action. Either way, a clear plan needs to be put in place.
“There are two parts to this," says Ritchie. “One is getting the right structures in place to grow the wealth efficiently, for example by taking advantage of basic ISA and pension allowances and potentially more sophisticated alternative retirement strategies. Then when it comes to accessing funds it's also really important to withdraw capital and income in the most efficient way." This may mean putting money into cash reserves to draw from in the first few years after retirement, then using a combination of pension lump sum withdrawals and capital and dividend payments to maximise the use of personal allowances throughout the retirement years.
Another factor that has to be considered is how near to retirement you are. “If someone closer to retirement doesn't have the pot they had hoped for, they may decide they have to take extra risks. But that isn't something we would typically recommend if a significant portion of those funds need to be accessed in the short term," says Day.
5. Don't forget succession
For some individuals, it will be important to view their retirement planning in the context of a succession. It's possible you already have separate vehicles in place for this – for example, trusts – but there are potential tax implications from retirement planning, including from inheritance tax (IHT).
Most modern pensions sit outside of an estate for IHT, for example, so this may affect your decision over whether or not you draw on them during your retirement. It may make more sense to first spend other assets which would otherwise be exposed to inheritance tax in the event of your death. That way the value of any pensions can be preserved and passed on without a significant IHT liability.
6. Undertake regular reviews
Because circumstances can change, it's important to make sure your retirement plan is reviewed on a regular basis to ensure you remain on track.
“We always recommend reviewing retirement plans annually as a minimum," says Ritchie. “That review will involve multiple aspects, such as how any investment strategy is performing, whether you are spending more or less than before, and if that means changes need to be made."
Alternatively, that review may reveal nothing needs to be changed and everything is progressing as expected, which in itself can bring significant peace of mind.
A comprehensive and holistic approach to retirement should deliver the pot you need, ensure you are drawing it in the most cost-effective way, and enable you to take care of what matters to you most.
NEW RESEARCH REVEALS DIFFERENT GENERATIONAL ATTITUDES TOWARDS WEALTH MANAGEMENT
Four in five affluent 25–34 year olds have a wealth management solution in place, and nearly a third (31%) have either started using a wealth management solution within the last six months or plan to find one in the next six months
25-34 year olds placed most importance on getting advice on taxation, diversifying assets and efficiently planning for their future
55–65 year olds valued guidance on investment management the most highly
86% of 25-34 year olds would benefit from guidance on credit related products compared with only 16% in those aged 55 and older
Respondents hesitated to apply for a wealth management solution because of a lack of knowledge or because the solution did not fit with their values
New research* conducted by RBC Wealth Management, part of Royal Bank of Canada, showed that four in five (79%) affluent 25–34 year olds in the UK have a wealth management solution in place and nearly a third (31%) have either started using a wealth management solution within the last six months or plan to find one in the next six months. 6% claimed to not need a wealth management solution.
When looking for a wealth management solution, 25-34 year olds placed the most importance on getting advice on taxation, diversifying assets and efficiently planning for their future, as well as advice on how to manage the responsibility and emotion of having wealth. This contrasted with 55–65 year old respondents who valued guidance on investment management the most highly.
The top reason why respondents hesitated to apply for a wealth management solution was because they lacked sufficient understanding of wealth management and the products and services available (29% of 25-34 year olds vs 9% of 55–65 year olds) or because the solution did not fit with their values (24% of 25-34 year olds vs 16% of 55–65 year olds). The former highlights the lack of financial knowledge among the young and the latter shows how generations differ in their ideals and mindsets about managing money. While older generations tend to value building their wealth and businesses the most, the young are more concerned about investing responsibly and finding a purpose for their lives.
Commenting on the findings of the survey, Katherine Waller, Head of New Sales Delivery at RBC Wealth Management, said: “We found that a large proportion of younger respondents currently have or plan to have a wealth management solution in the near future. Even though this tech-savvy generation are familiar with accessing information and financial solutions online, the research shows that they are still eager to receive tailored guidance on the complexities of managing wealth. We know first-hand that younger generations place value on receiving insights and being constructively challenged on their views, and we play a key role in helping them understand financial products and the responsibility that comes with having significant wealth.
“Financial planning should not be viewed as something that only applies to older generations. It is crucial to demystify wealth management services in the eyes of the younger generation and educate them as early as possible on how to plan for their future as their future starts today.”
Vikram Anand, Managing Director, Relationship Management at RBC Wealth Management, added: "RBC Wealth Management's significant experience in serving clients across multiple generations has provided us with a deep insight which allows us to understand and adapt to the changing attitudes towards wealth. This positions us perfectly to continue providing highly personalised solutions to clients, encompassing financial planning, trust and fiduciary services, investment management, banking and credit services. Through RBC's global capabilities, we are also able to support clients' complex personal and business needs, for example in global markets, investment banking or managing finances across borders.
"Looking to the future, RBC Wealth Management has adjusted its offering to better service a younger, more tech-savvy client-base, including delivering greater financial education through a range of communication channels, from face-to-face meetings to social media platforms. We work collaboratively in multi-generational teams to better reflect the clients we serve - both the older and younger generation within a family - and to ensure that values are recognised and represented across age groups."
To find out more about RBC Wealth Management’s services, visit rbcwealthmanagement.com
*Source: Survey conducted in collaboration with Kantar media with 600 respondents with a minimum of £500,000 investible assets
Royal Bank of Canada is a global financial institution with a purpose-driven, principles-led approach to delivering leading performance. Our success comes from the 87,000+ employees who leverage their imaginations and insights to bring our vision, values and strategy to life so we can help our clients thrive and communities prosper. As Canada’s biggest bank, and one of the largest in the world based on market capitalization, we have a diversified business model with a focus on innovation and providing exceptional experiences to our 17 million clients in Canada, the U.S. and 27 other countries.
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About RBC Wealth Management
RBC Wealth Management directly serves affluent, high net worth and ultra-high net worth clients globally with a full suite of banking, investment, trust and other wealth management solutions, from our key operational hubs in Canada, the United States, the British Isles, and Asia. The business also provides asset management products and services directly and through RBC and third party distributors to institutional and individual clients, through its RBC Global Asset Management business (which includes BlueBay Asset Management). RBC Wealth Management has C$1.3 trillion of assets under administration, C$1 trillion of assets under management and more than 4,800 financial consultants, advisors, private bankers, and trust officers.
For more information, visit: rbcwealthmanagement.com
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