ADVERTISEMENTWith the current volatile global economic environment, retirement planning has become all the more important.
Escalating trade tensions, along with sticky-high inflation and relatively high interest rates in several parts of the world have made it vital for people to protect their assets against market fluctuations.
Upcoming changes in pension and inheritance tax rules in the UK could also make planning your retirement trickier.
Joshua White, financial expert and head of growth at Level Group, a lender specialising in family law, said in a note: “From April 2027, the rules around pensions and inheritance tax will change significantly, as most unused pension funds will be included in the value of an estate for inheritance tax purposes, removing a previous exemption.”
He added that this move is likely to especially affect those on defined benefit schemes, although it will not be as big a concern for those on defined contribution pensions.
“Given current property prices and fiscal drag, we estimate that around one million UK properties currently just below the inheritance tax threshold could become liable due to these changes. As property is often the main asset in an estate, this will bring many estates into the scope of inheritance tax for the first time,” White said.
He also pointed out that this change is designed to stop pensions from being used as a tax planning tool rather than a means of providing for retirement. As such, beneficiaries and executors need to start planning accordingly and be aware of potential tax implications.
The 30:30:30:10 pension planning rule can help significantly in these kinds of rapidly changing situations, by helping you consistently save for your pension, budget better and achieve your retirement goals in a sustainable manner.
How does the 30:30:30:10 rule work for retirement planning?
The 30:30:30:10 pension planning rule says that you save 30% of your savings into bonds, 30% in stocks and shares, 30% in real estate or property and 10% in cash.
Antonia Medlicott, founder and managing director at financial education specialists Investing Insiders, said in a note: “The idea behind this rule is that having a roughly equal split of your investments spread across property, bonds and stocks will reduce the risk you take by protecting you against shocks in any of those markets, while allowing you to benefit from their growth in the long-run.”
This can go a long way in helping your money be apportioned in the most efficient and profitable way, which can be much better in the long run than just letting it sit in a savings account. This is due to most savings accounts not paying interest rates that are high enough to combat the current rate of inflation. This means that if high inflation persists, your savings may well be significantly eroded by the time you reach retirement.
The time value of money, which essentially says that €1 today, is likely to be worth quite a bit more than €1 in 20 or 30 years, also helps in shrinking the value of your savings over the years. In this way, using the above rule can help you significantly beat the risk of inflation.
The 30:30:30:10 pension planning rule also ensures that, by spreading out your money among a variety of assets such as stocks, bonds, real estate and cash, you are considerably reducing your portfolio risk. In case of emergencies, you still have access to ready cash, through the 10% of your portfolio allocated to cash and cash equivalents, without needing to dip into any of your longer-term investments.
Is the 30:30:30:10 pension planning rule right for you?
Medlicott highlighted: “The main downside of following a rule like this throughout your retirement planning is that you could end up with lower gains long-term. This is because generally, investing in the stock market yields higher returns than bonds and property, and 30% is a pretty low percentage of your portfolio to have invested in the stock market.
“So, investors should keep in mind that this might be a ‘safer’ way to plan for retirement, but may not be the most profitable over the long term.”
ADVERTISEMENTShe also pointed out that pension providers usually tend to take higher risks with your money when you are younger. As people get older and closer to retirement, pension providers tend to shift their funds into less risky assets.
“This ensures you benefit from higher growth while you’re able to take the hit of any short-term volatility and that you’re then less at risk closer to when you’d need to take your money,” Medlicott said.
She added: “”If you’re not sure how best to save for retirement, it could be worth speaking to a professional financial planner who can assess your appetite for risk and what your goals are and help structure your investments to fit with that.”
Robbert Mulder, operating partner at Senior Capital, explained that the 30:30:30:10 rule might not always be the best option for people who are already retired or close to retirement. As such, these people may need to explore other possibilities to secure their financial stability, especially considering the uncertainty of investment returns.
ADVERTISEMENT“Equity release mortgages are gaining popularity in Europe as a viable option for retirees. These mortgages allow homeowners to access the equity in their homes to supplement their retirement income without the immediate need to pay interest, providing a stable financial option amid uncertain investment returns,” said Mulder.
He added: “The increasing popularity of equity release mortgages is a natural response to the societal challenges faced by many European countries. These financial tools provide retirees with a valuable opportunity to enhance their financial flexibility. By unlocking the equity in their homes, retirees can increase their disposable income, thereby directly improving their quality of life in retirement.”
Mulder pointed out that when carefully managed with expert guidance, equity release mortgages could balance long-term objectives such as safeguarding inheritance for future generations and maintaining financial health with the immediate need for financial security.
It is important to remember that the 30:30:30:10 pension planning rule, as with any other financial or retirement planning rule, is not a one-size-fits-all rule and should only be used keeping your own risk tolerance, financial goals and available funds in mind.
ADVERTISEMENTIn several cases, you may find that tweaking the specific percentages to suit your individual goals may work better for you. You could, for example, allocate a higher percentage to stocks, or a lower percentage to bonds, depending on your risk preference.
A reminder, this information does not constitute financial advice, always do your own research on top to ensure it’s right for your specific circumstances. Also remember, we are a journalistic website and aim to provide the best guides, tips and advice from experts. If you rely on the information on this page, then you do so entirely at your own risk.
