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 – whether they are a corporate executive, a business owner or beyond – 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 are still physically active. A proper plan will help to ensure the right arrangements are in place to fund a desired lifestyle and also to cover any unexpected expenses along the way.
Mark Hassett, head of the corporate executives team at RBC Wealth Management in London, 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,” he says. 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.
First determine if you have a pensions issue
One of the biggest myths about retirement planning is that any conversation on the topic means talking about pensions, Hassett 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. Given that the UK government has introduced lower annual and lifetime contribution limits for pensions in recent years, higher earners need to be aware of these thresholds and their implications based on their personal circumstances. These lower thresholds also mean they are increasingly turning to other investment vehicles for their retirement savings.
Dion Lindskog, head of wealth structuring at RBC Wealth Management in London, says many high earners do not realise they have a pensions problem. “Many people 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,” he says. With that in mind, Lindskog says that by conducting a thorough review of a client’s financial situation, any potential pension problems can be highlighted and then solved.
Make use of all your options
Hassett 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?
- How can I pass my residual assets to my chosen beneficiaries efficiently on my death?
When it comes to creating a plan for a client’s life in retirement, Lindskog 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, Lindskog says, starting with pensions and ISAs. As a next step, depending on circumstances and attitude to risk, clients might want to consider enterprise investment schemes, venture capital trusts, offshore bonds 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,” Lindskog says.
Include your family in your retirement plan
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,” Lindskog says. “What they’re missing here is that anyone can contribute to another person’s pension plan up to the £40,000 annual limit.”
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 more 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. This can also be an attractive way to pass wealth down the generations without the danger of it being used unwisely when the children are young.
Solve any over-concentration problems
An often overlooked 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 Lindskog 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,” Lindskog 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 perhaps to a charity. Lindskog says that this is an important factor that needs to be considered. “The reality is that clients of this type 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.
In these ways retirement planning, even for the wealthy, can reap rewards: no one can put a price on the peace of mind that comes from knowing that you and your heirs are well provided for and that your legacy lives on.
The investments or services contained in this report may not be suitable for you and it is recommended that you consult an independent investment adviser if you are in doubt about the suitability of such investments or services.
Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. This article is not an offer to sell or a solicitation of an offer to buy any securities. This article is not, and under no circumstances should be construed as, a solicitation to act as a securities broker or dealer in any jurisdiction by any person or company that is not legally permitted to carry on the business of a securities broker or dealer in that jurisdiction. Nothing in this report constitutes legal, accounting or tax advice or individually tailored investment advice.
This publication has been issued by Royal Bank of Canada on behalf of certain RBC ® companies that form part of the international network of RBC Wealth Management. You should carefully read any risk warnings or regulatory disclosures in this publication or in any other literature accompanying this publication or transmitted to you by Royal Bank of Canada, its affiliates or subsidiaries.
The information contained in this report has been compiled by Royal Bank of Canada and/or its affiliates from sources believed to be reliable, but no representation or warranty, express or implied is made to its accuracy, completeness or correctness. All opinions and estimates contained in this report are judgments as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. This report is not an offer to sell or a solicitation of an offer to buy any securities. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Every province in Canada, state in the U.S. and most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as the process for doing so. As a result, any securities discussed in this report may not be eligible for sale in some jurisdictions. This report is not, and under no circumstances should be construed as, a solicitation to act as a securities broker or dealer in any jurisdiction by any person or company that is not legally permitted to carry on the business of a securities broker or dealer in that jurisdiction. Nothing in this report constitutes legal, accounting or tax advice or individually tailored investment advice.
This material is prepared for general circulation to clients, including clients who are affiliates of Royal Bank of Canada, and does not have regard to the particular circumstances or needs of any specific person who may read it. The investments or services contained in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about the suitability of such investments or services. To the full extent permitted by law neither Royal Bank of Canada nor any of its affiliates, nor any other person, accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or the information contained herein. No matter contained in this document may be reproduced or copied by any means without the prior consent of Royal Bank of Canada.
Clients of United Kingdom companies may be entitled to compensation from the UK Financial Services Compensation Scheme if any of these entities cannot meet its obligations. This depends on the type of business and the circumstances of the claim. Most types of investment business are covered for up to a total of £85,000. The Channel Island subsidiaries are not covered by the UK Financial Services Compensation Scheme; the offices of Royal Bank of Canada (Channel Islands) Limited in Guernsey and Jersey are covered by the respective compensation schemes in these jurisdictions for deposit taking business only.