Since the introduction of George Osborne pension freedoms in April 2015, when you are going to maximize payments, it has never been so important to have a well-prepared financial plan to provide greater access to retirement.
Professional planners can now use cash flow planning software that will simulate your goals and compare effects with different “what if” scenarios so you can predict results rather than learn from experience. It has also changed the ranking order that a financial advisor offers in terms of value, from finding suitable products to actually managing your assets to achieve goals. Each consultant will have a system through which they will guide you, so let’s look at an example and introduce you to “P&E”.
Goal, progress and plans
Each “retirement pot” must have a label indicating its purpose. At this stage, the amount in the pot does not matter, its function is important. Should it provide an emergency reserve or will it be a drawdown account to cover your annual expenses? Once you confirm the goal, you can assess its progress. Is it enough in the pot to fully fulfill its purpose? If not, it will be replenished from other banks or from income. As it was in the past, does it work as expected? Third, what are the planned actions for this pot?
Can you make any improvements and is the tax remedy suitable for this purpose? Does the asset allocation reflect the correct risk or volatility for the relevant terms? Planning adds little value when it is not accompanied by action, but action seems much more difficult, so the second part of this example is Es, a small checklist that helps confirm that the proposed action is correct.
Important, effective, efficient
Remember that you are trying to prepare for the future, so any pleasure can take many years. People do not know how to postpone pleasure. Some say that a successful investment is to share 10% of the right vehicles, 90% of the right emotions.
Four Es will help you split your mind to align with the pots above in order of priority.
First, is the purpose of this pot important? If so, you have no choice. The simplest action is to make it simple.
Second, have you identified the shortest path to the goal? Are you using the right vehicle? Here you will be presented with options, some more exciting than others. What is most effective in the least amount of time?
Third, if you develop a successful habit of managing your finances, your skill set will improve. You will be able to identify small improvements in the entire portfolio, as well as take into account external changes in tax ranges, etc. Now you need to have the confidence to take the right action at the right time.
You also need to feel more knowledgeable and confident in talking about the proposed changes with a specialist.
Here is an example of a portfolio of five types of retirement pots and their purpose.
- Emergency reserve: The first pot does what is written on the can. I would suggest keeping six months of monthly expenses in this bank in a cash account with instant access.
- Output pot: Calculate your monthly expenses from here to replenish any guaranteed income you receive from a state pension or annuity. It can be stored in a mix of cash and index licenses and can usually support 36 months of cash withdrawals.
- Safety pot: This provides funds in the event of a miscalculation or “black swan” event, such as the current pandemic. You don’t want to put off your financial life, so this bank is a backup.
- Flexible pot : It contains all the funds that still need to be allocated for specific purposes. The performance of this portfolio should not affect daily life and it should have an open term. Immerse yourself in this pot to get luxuries like a family cruise or learn about investing by running a small portfolio of stocks. Here you can afford to make the most mistakes.
- Heritage pot: Determine what you would like to leave for the next generation. Ask yourself if it’s best to leave money to your loved ones after you’re gone, or share their success now. Think of the difficult growth in the right name and the implications of an inheritance tax.
Remember that professional financial planners are trained to hold your hand through the processes above. Perhaps you should first contact a friend and ask them for advice.