Question: What do you need for a happy retirement?

Answer: About £703,000 a year should do it!

As I write a huge controversy has been provoked by the news that former Chief Executive of the failed Royal Bank of Scotland , Sir Fred Goodwin, has been receiving a pension in excess of £703,000 since his resignation last year. You will be pleased to hear that I do not propose to add to the debate - suffice to say it's a disgrace - but the furore has prompted me to consider what we need to do to be ‘in clover' when we retire, and no, failure is usually not the best strategy to adopt.

Sometime ago when my father was two years into his retirement I asked him how he was enjoying it, and he replied; ‘it's okay if you can afford it'. Thinking about his response it soon dawned on me that in retirement every day is like a weekend. If you are like me most of my personal spending occurs at the weekend; be it a game of golf, a pint or a trip to the theatre. So maybe the first thing we need to realise is that we may require more clover than we originally thought.

Many people arrive at retirement, discover what their pension will deliver and then plan their future from there. Those of you in the military will no doubt have a much clearer idea of what you will receive when you leave the Forces, but what I suspect few of you will know for certain is the age at which you will stop working, and the amount you will then receive. So it makes sense to start your pension planning by deciding when you want to retire (although circumstances do change, as we are all too painfully aware at the moment), what sort of life you want to live in retirement and indeed where you wish to spend it.

There have been many changes to pension legislation over the past couple of years, and likewise to the attitudes taken by employers over the provision of occupational pensions for their employees. Whilst most of the commercial sector has moved to money purchase schemes to provide their employee pension plans, those working in the public sector, such as local government, continue to hold final salary pensions. A final salary scheme has the great advantage of enabling you to know exactly what you will get when you retire, usually based on your final year's pay and the number of years you have been a member of the scheme. Money purchase schemes have no such guarantees; instead the benefits you will receive are based on two factors - the amount of money contributed to the pension fund and the investment performance of the assets into which it is placed. This does not mean they are to be avoided, indeed all personal pension plans are built on this model, but if you ever have a choice between the two I wouldn't hesitate – final salary is the way to go.

To calculate your retirement income you should look at all the income options available to you, and these potentially include:

The State Pension

The full basic State Pension is currently £90.70 a week for a single person and £145.05 a week for a couple, but individual circumstances can affect the amount you receive. Eligibility starts at age 60 for women, and 65 for men, and from 6 April 2020 the State Pension age will be 65 for both men and women. Depending on your circumstances when the time comes you may also be eligible for Pension Credit.

Occupational Pension Plans

You may have more than one occupational pension from a number of past employers. The value of each plan will vary according to the contributions you and your employer made, and the performance of the investments. The Pension Administrator in each case will be able to provide you with a valuation so you can calculate what you are likely to receive on retirement.

Personal Pension Plans

You can set up a Personal Pension regardless of whether you work or not, and this can be an effective tax saving measure for partners who do not work. As with occupational pensions, the income will be determined by the amount and length of time the funds were invested.

Savings and Investment Income

This will depend on how much capital you have invested, which nearing retirement could originate from downsizing your home or selling assets.

Rental and Business Income

Financial initiatives taken pre-retirement may continue to generate income well into retirement.

So having taken the first step to establish the income you need to live the lifestyle you desire, by calculating what you will receive from each of the above you can determine what, if anything, needs to be done to achieve your retirement goal. I suspect that for most of you, like me, it will mean either cutting your cloth accordingly or saving even harder now.

However all is not lost if you cannot see a way of either reducing you retirement spending or increasing your income, because where you decide to live out your retirement can also dramatically influence your financial requirements. If it is to be in another country, Cyprus for example, then you may be able to factor in some of the following benefits:

Cost of living

Apart from food and entertainment how do the housing costs, such as utilities and local property taxes, compare? From my experience of Cyprus, admittedly under more normal exchange rate conditions, I would suggest most of us would find them 20% cheaper than the United Kingdom.

Income Taxation

Countries have their own regulations regarding the taxation of retirement income, and they can make a tremendous difference to an individual's net income. If we look first at the UK, the basic tax-free personal allowance for the year 2008/09, up to the age of 64, is £6,035. Thereafter any additional income up to the first £34,800 is taxed at 20%, with any balance over and above that figure taxed at 40%. As you get older the personal allowance increases, dependant on both your age and annual income. http://www.hmrc.gov.uk/rates/it.htm

Cyprus on the other hand encourages retired residents from overseas by taxing their pensions at the rate of 5% on income above €3,417 a year, whether it is a state, company or personal pension. To qualify for the low rate, you must have lived in the country for at least 183 days.

Alternatively, you can pay the normal Cypriot rates, in which case the first €19,500 is tax free, rising to 30% on €36,301. So the smaller your income, the better off you are under the normal system. In addition the UK state pension paid to retirees in Cyprus is, by virtue of the Reciprocal Social Services Agreement between UK and Cyprus, index linked.

So as the new financial year approaches I hope I have got you thinking about the future. Bluntly, none of us want to be struggling in retirement if, with some careful financial planning, perhaps with the help of an independent financial adviser, we can do something to avoid it now.

Until the next time then, but before I go I can't resist taking another look at the web for the latest on the Goodwin saga - watch out Cyprus, Fred is thinking of leaving the UK until the storm blows over!

Al Voice

MD Forces Financial