Are you planning to retire this year? If so, congratulations! Retirement is a milestone you may have been looking forward to for years, but it’s not one you should just dive into. There are steps you should take to ensure your retirement lives up to expectations.
1. Think about the retirement lifestyle you want
You might have spent a lot of time looking forward to retirement, but have you really thought about the lifestyle you want? Often, we focus on giving up work and getting more free time for ourselves. Yet, how we’ll fill that time can end up being forgotten about or we focus on the big events we have planned.
Thinking about the day-to-day lifestyle you hope to achieve not only gives you some direction, but is important for planning your finances too. Are you looking forward to pottering in the garden or do you hope to indulge in new hobbies? Are you planning to travel more or spend more time with loved ones? Without a blueprint, retirement can end up falling short of expectations.
2. Make a budget
With an idea of the lifestyle you want to achieve in mind, it’s time to start putting together a budget. This should cover two areas. The first should look at what your day-to-day outgoings need to be to meet your goals, from covering essential bills to disposable income to spend on luxuries. This can give you an idea of the regular income your pension needs to generate throughout retirement.
Second, you should list one-off expenses that you plan to make in retirement. Typically, retirement spending is at its highest during the first three years as we make big-ticket purchases. This could be renovating your home or travelling more. Remember to factor these in when assessing your pension and how to access it.
3. Assess how long your pension will need to last for
An annual budget isn’t much use if you don’t think about how long you’ll need to draw this income for. As a result, life expectancy is an important part of retirement planning.
Whilst retirement age is rising, we’re living far longer than previous generations. Those looking forward to retiring in 2020 may expect to live for several more decades. Therefore, your pension needs to stretch further too. Understanding how your wealth and pension will deplete over the next 30 years or more can provide confidence that you’ll remain financially secure throughout your lifetime.
At this point, you should also consider the impact of inflation. Inflation means the cost of living rises and whilst this makes relatively little difference year-to-year, over the long term the impact can be significant.
4. Find out what State Pension you’re entitled to
The State Pension can provide a base to build your retirement income on. It’s a reliable source of income that will last throughout retirement. How much you receive will depend on your National Insurance record. Those receiving the full State Pension in 2020/21 will receive £175.20 per week. If you haven’t already checked when you’ll receive the State Pension and how much you could receive, you should do so here.
5. Review your pension pots
Over your working life, you’ve been paying into a pension, but understanding how this translates into an income can be difficult. This is why reviewing your pension pots to create a plan that’s tailored to you is important.
If you have a Defined Benefit pension, also known as a Final Salary pension, this will provide a regular income for the rest of your life.
If you have a Defined Contribution pension, you will need to decide how and when to access your pension. The options include purchasing an Annuity, which will provide an income for life, and entering Drawdown, which allows you to take flexible payments whilst your savings usually remain invested.
Reviewing your pensions before retirement means you can see how they align with your lifestyle goals and help make the right choices for you.
6. Evaluate your other assets
Whilst pensions are often the focus of retirement planning, other assets play a role too. Even if you don’t intend to use other assets to fund retirement, it’s worth understanding what your options are. Other assets to consider include savings, investments and property.
7. Seek financial advice
Effective retirement planning involves pulling together numerous different strands to create the lifestyle you want. There’s no one-size-fits-all solution when it comes to retirement so it can be difficult to know what is right for you. This is where financial planning and advice can be invaluable. We’ll combine your lifestyle goals with the financial means to help you create a retirement blueprint that provides confidence as you start the next chapter of your life.
Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.
Being able to take a tax-free lump sum out of your pension when you reach pension age certainly sounds appealing. It can help you kick-start retirement plans and fully enjoy the milestone, but is it always the right decision to make?
Currently, you’re able to take a 25% lump sum from your private pension at retirement age without incurring Income Tax liability. This option is usually available once you’ve passed the age of 55 but is set to increase to 57 in 2028. Once you take your ‘pension commencement lump sum’, your scheme is ‘crystallised’, and you should decide what you want to do with the rest of the fund.
Whilst taking a lump sum is a popular option and right for some people, you don’t have to take it.
If you’re thinking about taking advantage of the tax-free lump sum, there are two questions to ask yourself first:
- What do I intend to do with the lump sum?
- How will it affect my long-term finances?
Setting out plans for the withdrawn lump sum
The first thing to consider is why you want to take a lump sum out of your pension. You should have a clear plan about what you want to achieve with the money before you proceed.
In some cases, taking a lump sum out of your pension can make the first years of retirement more enjoyable and improve financial security. Perhaps you’d like to use it to pay off your mortgage before giving up work full-time or maybe you have plans to celebrate retirement with a once in a lifetime experience. There are plenty of reasons why a lump sum may be appealing.
However, there are plans where taking out a lump sum may not make sense financially.
Recent research asked retirees taking taxed lump sums from their pension in the last year about their plans, revealing an insight into why people make withdrawals from their pension. The top two priorities were to add the money to a savings account or simply put it in the bank. It’s prudent to have an emergency fund you can fall back on if needed but having too much held in cash can be a bad thing too. Interest rates are low and it’s likely pension lump sums withdrawn to sit in the bank will be losing value in real terms.
One in ten people also took pension cash with the plan to reinvest the money back in stocks and shares. If you’ve chosen to access your pension flexibly, it will usually remain invested until withdrawn. As a result, it’s important to look at the balance of your investments and why you’re withdrawing pension investments, where returns aren’t taxed, to other products that could face Capital Gains Tax.
Before making any pension lump sum withdrawal decide how you’ll use the money and weigh up if it’s the best course of action with your goals in mind.
Understanding the long-term impact
It’s also important to look at the bigger picture. After all, you saved into a pension for decades in order to create an income that will last you the rest of your life. Taking a lump sum out of your pension during the early years of retirement can have a long-lasting impact.
Before you take action, assessing what a lump sum withdrawal means over the long term is important. With modern retirement spanning several decades, it can be difficult to know if using a lump sum at the start of retirement will have an impact 20 or 30 years’ down the line. This is where financial planning can help.
By understanding the lifestyle you want to achieve throughout retirement, we’ll be able to help you see if that’s achievable under different scenarios, including after you’ve taken a lump sum. The good news is that we often find retirees are in a position to meet their short and long-term retirement goals. Careful financial planning and considering the long term gives you the peace of mind to fully enjoy your retirement years both now and in the future.
At the point of retirement, there are numerous decisions to be made, from when and how you actually want to retire to how to access your retirement savings. We’re here to make your transition into retirement as smooth as possible, please contact us to discuss your aspirations for the future and how your saving can help you achieve them.
Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.