Ask a planner answers: retirement plans

Tuesday, June 7, 2016

The question, from J Ferguson, 59 living in the UK

I have about £430,000 in investments in England and the USA.  I am resident in UK for tax and have lived here over 40 years retaining my American passport.What would you recommend for my retirement plans? I only have a small personal pension of about £40,000.

The answer, from David Hearne CFPTM from Satis Asset Management

You have not said when you are planning to retire therefore my comments are based on the expectation that you are planning to retire shortly. I have also assumed that you intend to remain in the UK. If you have a partner or any dependents I recommend you take them into consideration when making plans for your own retirement.

If you have not done so, I recommend reviewing your current expenditure and consider what changes you might expect once you retire. Knowing the income you require in retirement will enable you to consider if you have sufficient pensions and other investments to meet this income need or whether you may need to postpone your retirement plans.

If you are 59 your state retirement age in the UK will be 65. I recommend using the website to request a State Pension Statement. This will confirm when you reach state pension age, the number of qualifying years you have paying National Insurance and the amount of your expected State Pension. In April 2016 the Government are introducing the Single Tier State pension which I expect you will receive when you retire. Therefore the actual amount you receive is likely to change between a forecast now and your actual state pension age.

If you are retiring early you may wish to consider ways you can use your existing investments to provide you with a regular cash flow to meet your expenditure needs until your State Pension starts.

You could use your ISA and other investments to purchase an Annuity. This will give you the certainty of a fixed income.  However, annuity rates are currently very low and potentially you would be locking in a low income for a long time. Alternatively you could consider using your investments to generate an income. You could do this by seeking investments that pay an income or by taking capital withdrawals from a diversified portfolio. It is important to consider if your income needs require a particular return on your investments, whether this is possible, and whether you are comfortable with any risk that may be required to generate this return. I recommend you meet with an experienced financial planner to look at this in detail as the decisions you make will have a long term impact.

If you have sufficient current earnings you may wish to consider using your investments to make a contribution to your personal pension. Particularly if you are a higher rate taxpayer now, but expect to be a basic rate tax payer in retirement. You are entitled to take 25% tax free cash from your pension. You could also use your remaining pension to purchase an annuity to provide you with a fixed income.

Although you are a UK resident and pay tax in the UK if you are an American citizen you are still required to file a tax return in the US. If you do not do this, I recommend you speak to an accountant that specialises in working with US citizens.

There are tax treaties and agreements between the UK and US however not all UK investment wrappers are recognised by the US tax authorities.  The US generally recognises UK pensions as a tax wrapper (Although these can attract additional information reporting) but they do not recognise the tax free status of ISAs. Therefore you may be liable for tax in the US on any income or gains made in your ISAs.  The US also applies special tax rules to certain types of non-US investments.

Planning for retirement is one of the biggest financial decisions you will ever make, I have only been able to cover some basic point here. I recommend you meet with a financial planner to look in detail at your requirements and how you can best achieve them.

David Hearne CFPTM
Wealth Management Adviser
Satis Asset Management