Financial Planning in your 50s

During your 50s, a solid financial plan becomes of greater importance, to ensure that your money is in the best shape for the future. Wherever you live in the world, this stage of your life offers an ideal time to evaluate where your finances stand and try and visualise what you want your retirement to look like.

At this point you’re likely to have the best opportunity to accumulate wealth and accelerate savings for the future. As well as enjoying more financial stability, you’ll probably be at the peak of your earning potential, with a well-established career. You might also have paid off your mortgage, and your children may be becoming more independent. These factors mean it can be a good time to review your future financial plans and ensure you’re well prepared for retirement whilst enjoying the lifestyle you’ve created.

Preserving wealth in your 50s

Financial stability is typically achieved through a combination of several factors. You should have an emergency fund of accessible cash, which you can easily access if needed. Generally, it’s helpful to set aside around three – six months of cash to cover living expenses, in case of an unexpected event. Once this is in place, your remaining capital can be used for your longer-term plans, including pension and a more general investment portfolio.

You may have greater ability to save, having built other capital reserves and regular contributions to your pension.  Investing in your 50s is very effective, you may still have 10 or 15 years of time to build wealth and, importantly you will have possibly 20 to 30 years in retirement to live from this capital, so you will most likely keep it invested.

Understanding inheritance and planning for the future

During this phase of your life it’s helpful to start thinking about how you want to pass on assets to family. You might have specific plans for your home, or other specific assets, so thinking ahead can be very beneficial.

Sharing your wealth with family members and your children can also help reduce Inheritance Tax (IHT). With more and more families caught in the IHT net (especially in the UK), as a result of rising house prices and frozen tax allowances, this is an important area of financial planning. Making gifts to individuals or setting up a trust can be very powerful ways to help reduce the tax burden, as well as see your wealth being enjoyed whilst you’re still around. There are other useful options to gift your wealth too – including topping up your partner’s or children’s pensions if you have funds to spare. This can be highly beneficial from a tax perspective especially if they aren’t earning themselves – by contributing £2,880 a year you’ll attract tax relief which will top funds up to £3,600.

Writing a Will

When it comes to Estate planning the most important document to have in place is a valid Will, which you should review at least every five years, or when there are significant changes in your life, such as the birth of grandchildren. It can also be very helpful to share your thoughts and plans with your family, so that they are aware of your intentions and there are no surprises.

Pension planning and optimising tax benefits

While the prospect of retirement can be exciting, establishing a plan to ensure you can enjoy financial freedom can feel like a daunting task. The first step when pension planning is to gauge whether your plans are on track. Pension calculators can help, along with modelling your future with a financial adviser. But don’t worry if things don’t feel they are quite where they need to be – there’s still time to act.

One of the key factors to get to grips with is how much you might need to fund your retirement. The Pensions and Lifetime Savings Association (PLSA) have set out three living standards to help guide those who are approaching retirement:

  • Minimum: £14,400 a year covers basic needs with a little spare money for ‘treats’.
  • Moderate: £31,300 a year offers a more financially secure lifestyle.
  • Comfortable: £43,100 a year would mean you have more financial freedom and can afford some luxuries.

With rising life expectancies, be realistic about when you plan to retire, and how much your pension might need to last. If you plan to retire at 55, and with current life expectancies in the UK sitting at 82 for women and 78 for men, you may well need more than you think to enjoy a comfortable retirement.   Remember if you prefer to secure some income from annuity you will receive significantly less if you are 55 than say 75.

It can also be useful to check your UK State Pension forecast and factor in any top ups which might be needed to ensure you’ll receive a full contribution. Other countries where you may have worked will have similar calculator available.

Pension contributions to reduce taxable income

Increasing your workplace or personal pension contributions can offer a substantial boost in the form of tax relief and can reduce your taxable income too. This can prove particularly effective if you pay tax at the higher or additional rate now but will pay tax at a lower rate in retirement.

If you are a basic rate taxpayer the government will add 20% to your contributions, but higher rate taxpayers receive a bigger top-up of 40%. Additional rate taxpayers can enjoy a 45% top up.

Of course, making contributions from your salary also means that you’ll reduce the amount of Income Tax which you’ll pay.

ISA strategies: tax-efficient saving in your 50s

An Individual Savings Account or ISA is an option for UK investors, and a very tax-efficient way to save, especially if you’re already making use of your full annual pension allowance. ISAs are free from Income Tax, Dividend Tax and Capital Gains Tax – so can be an excellent shelter for your savings. You can also withdraw money from your ISA free from tax. Make sure to always use your full entitlement – the current allowance is £20,000 each year plus a newly planned additional ‘British ISA’ allowance of £5,000. Building an ISA investment can also offer you a supplementary income in retirement, especially if you plan to retire early, and ahead of the time when you can access other pension options; you can’t take your pension until you hit 55, and that will rise to 57 from 2028.

Financial planning during your 50s can be an extremely valuable exercise, helping you gain a clear picture of where your finances stand, and the steps you need to take to ensure you can enjoy the next stage of your life.

Working with a financial adviser is usually a good place to start, helping you crystallise your thoughts into a solid plan.

To discuss any aspect of your financial plans, contact your nearest office.

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