Managing director of Woodward financials, David Woodward shared his checklist for retirement planning with express.co.uk
For some, the question isn’t how to save money but rather where to put it. Caught between turbulent markets and restless interest rates it’s hard to know which options are available to invest in and more importantly which will give you the best returns.
When savings start to accumulate, many first turn to their pension fund but Mr Woodward argues against this.
“Would you rather have £1million in your pension, which will more than likely make you a high-rate taxpayer for the rest of your life and you can’t access the money until you’re 55.
“Or would you want £1million in your ISA and get your hands on it a week?” he explained.
“If you end up with £1million in a pension, in order to benefit from that you’re going to have to take out £50,000 a year to remain a basic rate tax-payer.
“If somebody is prudent with their money they can use their ISA as a retirement provision.
“The growth is tax-free, the dividends are tax-free, it’s great.”
However, the one downside of an ISA is the allowance, because saving for retirement is likely to put your balance upwards of the current £20,000 limit.
So, once this limit has been reached the question is: where to next?
Mr Woodward recommends taking full advantage of capital gains allowance.
This provides another form of tax-efficient savings, but just like an ISA and pension fund, it must be carefully controlled to avoid going above the allowance and falling into the higher tax rate.
Once this tax allowance has been reached, you can move into investment bonds with the remainder of your retirement savings.
“They’re great for inheritance tax planning but 0.1 percent of an investment bond has a life assurance element to it,” Mr Woodward added.
This provides the best of both worlds for those heading into retirement or worried about inheritance tax affecting their loved ones.
“You’ve got the investing side but you also have the tax-efficient financial planning in that.”
Mr Woodward spoke about all four of these savings vehicles: “Maximise your contributions and create substantial tax-efficient income in retirement.”
Intertwined with vehicles like a stocks and shares ISA or investment bonds is the inherent risk that comes with investing.
Every investment comes with some form of risk, but deciding your appetite for risk can narrow down not just the options but the possibility of getting into a financial situation that you aren’t comfortable with.
“Once you know where you’re putting it it’s then how to invest it,” he added.
“You can’t build bespoke portfolios for clients, because a portfolio is only as good as the day it was built.
“The best performing fund in April/May was UK funds, in May/June it was property.
“This gives you an idea of how much the market moves.”
Mr Woodward recommends a funds-based approach for beginner or low-risk investors using the analogy of a swimming pool:
The financial advisors and planners are the lifeguards, and all the different stocks with a fund are the swimmers.
Essentially, the advisors (Fund Manger) should ensure that all the stocks stay afloat and none are drowning.
There are countless companies that we use everyday without consciously doing so, whether it’s your toothpaste brand of internet provider and it’s these types of stocks that are going to provide more stability without compromising returns.
“People do those activities every single day and they’re not going to stop doing those activities.
“The problem is people will look in the back page of the financial times and look at the best performing fund and go ‘that’s the one for me’ and then here we are three months/six months later and that best performing fund is now the worst performing fund.
“Even if something is the best performing it doesn’t necessarily mean that is the one you should choose,” he concluded.