For higher earners, retirement planning means looking at more than just pensions. Here are some key points to consider.
Common wisdom suggests that high earners have little to worry about when it comes to retirement planning. In fact, this is a long way from the truth.
No matter a person’s net worth, careful planning is required to ensure that risks are mitigated and objectives are achieved. This is particularly important given that many people want to maintain the same lifestyle in retirement as in their working life. In fact, income needs often rise during the early years of retirement given that many people go on holiday while they’re still physically active. A proper plan will help to ensure the right arrangements are in place to fund your desired lifestyle and to cover any unexpected expenses along the way.
William Sheard, director in the corporate executives team at RBC Wealth Management in the British Isles, says that retirement planning for clients with high earnings has a simple premise: “it is about structuring your assets so that they pay for the lifestyle you want.” However, the process is not always so simple. This is because higher earners not only have more complex compensation arrangements, but given many of them are internationally mobile and might have assets spanning more than one jurisdiction, they will also have more complex wealth planning needs.
One of the biggest myths about retirement planning is that any conversation on the topic means talking about pensions, Sheard says. Higher earners tend to have several compensation arrangements depending on their specific circumstances, consisting of a salary and bonus package, additional benefits such as onshore and offshore pension plans, share schemes, complex deferred compensation schemes, as well as life insurance and medical plans. Of all these, pensions are frequently a small component. But this does not mean they are not important.
Nisha Patel, director in the corporate executives team at RBC Wealth Management in the British Isles, says many high earners do not realise they have a pensions problem. “Many corporate executives are financially well off and don’t need their pension benefits, therefore they think they don’t have to worry about it. But what they don’t think about is that they can use them to help their family,” she says. With that in mind, Patel says that by conducting a thorough review of a client’s financial situation, any potential pension problems can be highlighted and then solved.
Sheard says that retirement planning means taking a holistic view of a client’s financial affairs to see if it is possible to anticipate any future problems, such as succession issues, and how they can be solved. This consists of considering three key questions:
Will my assets provide me with the net income that I need to provide the lifestyle I desire?
Do I need to take an unacceptable level of investment risk to maintain my lifestyle?
When it comes to creating a plan for a client’s life in retirement, Patel likens this to orienteering; first starting with looking at where they are in their life right now, where they want to be when they stop working, and then determining if they will be making any essential or desired stops along the way. The outcome of this will be a financial plan that is customised for the client’s specific needs.
Regardless of circumstances, everyone should try to take full advantage of the available wrappers and allowances available to them, Patel says, starting with pensions and Individual Savings Accounts (ISAs). As a next step, depending on circumstances and attitude to risk, clients might want to consider enterprise investment schemes, venture capital trusts, international bond wrappers and property investments.
Even if you are a high earner, using all of the available allowances and reliefs is not only shrewd, but can make a big difference over time. Spreading wealth across a range of different savings vehicles also has its benefits. This provides a degree of diversification, but the real benefit is that each one can be accessed at a different point in time to provide income when needed. When it comes to retirement income, “it’s about knowing which taps to open and when,” Sheard says.
Another often overlooked option for married clients is the spouse’s pension. It may be that both spouses contribute to their pensions, but if one of them either doesn’t work or doesn’t have a pension, this is a missed opportunity. “All too often we find that the spouse doesn’t have a pension,” Sheard says. “What they’re missing here is that a non-working spouse can still claim tax relief on gross annual pension contributions of £3,600. If they’re working, they can potentially make tax-relieved contributions of up to £60,000, depending on their relevant earnings.”
Making use of all of the family’s allowances and reliefs can make a big difference in the long run. Frequently, most or even all family wealth is in one spouse’s name. In such a case, making a pension contribution for the spouse has its advantages. While the tax relief in this arrangement will go to the person who holds the pension rather than the person making the contributions, it is still efficient.
Another avenue to consider is opening pension accounts for children, which in certain circumstances might be favourable to Junior ISAs because the money can’t be withdrawn until age 55, rising to 57 in 2028. This can also be an attractive way to pass wealth down generations without the danger of it being used unwisely when the children are young.
Another aspect of retirement planning is the question of how much wealth a corporate executive might have tied up in the company share scheme. This is one reason why Patel emphasises the importance of looking at every source of a client’s wealth. “If you’re in a share scheme, no matter how good your employer might be, you have a concentration risk,” Patel says. Therefore, depending on how much wealth is held in a single company’s shares, it might be necessary to seek additional diversification to act as a buffer in the event that the company share price falls.
Planning for life after work is not simply about covering living and leisure costs. For many people, it also means leaving a legacy, perhaps to the next generation and/or a charity. Sheard says that this is an important factor that needs to be considered. “The reality is that corporate executive clients often have more than enough money to fund retirement, so the real question they face is what they want to pass to their children and what their attitude might be to charities or philanthropic causes,” he says. This includes structuring a client’s wealth in preparation for leaving it to the next generation as well as arranging for gifts and donations to be made during their lifetime and upon their death.
Retirement planning done early, and done well, can reap rewards: no one can put a price on the peace of mind that comes from knowing that you and your loved ones are well provided for and that your legacy will live on.
This article was updated in October, 2024.
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