Are you planning to draw your pension this year? Don't make any plans until you read our checklist.
Nearly 700,000 people in the UK are planning to retire this year. A number of people may worry that they do not have enough savings in place, whilst others may feel although they have enough saved, there are too many choices available. Its important to plan correctly and make the most suitable choices for your situation. Here we run through the ten main points to consider if you are nearing retirement.
- Write down your assets
Before you make any decisions about your retirement you need to know exactly what you are worth and how much income you are likely to have. Gather all your paperwork and work out all the sources of income you may have in retirement. You may have Company Pension schemes, private pension plans and other investments such as ISAs, Shares and Cash Savings. These will all need to taken into account when planning for your retirement.
- Get a state pension forecast
This is really easy to do and is often overlooked. The government has a ‘Check your State Pension’ page which guides you through the process. The forecast will confirm the amount of pension you will receive, which will help with your planning and it will also identify if you have any shortfall in your qualifying years for the state pension. If you do have a shortfall, you can consider purchasing additional years where possible. The cost of buying a year’s state pension is £731 but it should generate an additional pension payment of £230 per year (based on current State Pension rates) which would work out as a 32% return on your investment.
- Calculate how much you will need in retirement
We find this varies massively from the people we speak to on a day to day basis. If you can sit down and work out how much you will need for day-to-day spending. This may be similar to now, although once you are no longer working you may find you spend more money on certain things such as heating and entertainment for example. Once you have estimated your day-to-day expenditure, then work out your other expenses. How often will you be going on holiday and how much will you spend?
- Work out whether you can afford to retire
We are all living longer and so it may be worth considering working longer so your pot can last. According to the Office of National Statistics (ONS) latest data, in 2014-2016 a 65 year old man in the UK would on average live until he was 83.5 and a 65 year old woman would live until she was 85.9.
- Don’t forget the impact of income tax
When taking your pension benefits, the first 25% taken from the pots is normally tax free, however any further withdrawals will be subject to income tax at your highest marginal rate once all available personal allowances and exemptions have been used.The personal allowance for 2018/19 is £11,850 so you will lose £2,000 in tax for every additional £10,000 you take from your pension. Its important to try and structure your income as tax efficiently as possible. Utilise all tax free allowances, especially if you are a couple as there are additional ways you can save income here. Also utilise ISAs and Capital Gains tax allowances where possible.
- Consider consolidating your pension pots
Many people have jobs with a series of employers throughout their working lives and thus build a number of pension pots. Having all of your pension savings in one place can make it easier to keep track of your finances and the overall charges are sometimes lower for one large pension than a number of smaller ones in different places. Its important to note that some older policies may have valuable guarantees attached which could be lost if you transfer them out. Its always important to check your original policy documents or with a suitably qualified financial planner before making such a change.
- There are lots of different ways of accessing your pensions now
Year ago, things were more straight forward and at retirement, people would buy an annuity which is often a fixed income for life. There are now a variety of ways you can access your pension and benefits can be taken much more flexibly. You can still buy an annuity, cash in part or all of your pension, draw a varied income from your pension but keep it invested. You don’t have to choose one option either, we have clients who might take a fixed income from one pot and keep the other pot more flexible for example.
This can be a complex area and if you don’t feel comfortable making these decisions on your own, financial education is available, as is regulated advice. Many people are concerned about the costs of advice but they should view it as an investment. Research suggests that an individual who takes advice as they build up, and then manage, a pension pot of £100,000 earned an additional income of £3,654 every year of their retirement.
- Consider the effects of inflation
When calculating retirement income, don’t forget to factor in the impact that inflation will have on the real purchasing power of your savings.
- Be careful to not take out too much from your pension pot each year
In the US as a rough rule of thumb, advisers often use a 4% withdrawal rate from the initial value of your fund each year. However how much you can comfortably withdraw before the pot is depleted will vary on how the pot is invested and your own circumstances. Its something you should regularly review if you decide to go down a more flexible route with your pensions pots.
- Protect yourself from scams
A staggering 10.9million consumers have been victims of cold calls about their pension since April 2015, according to Citizens Advice. Make sure any company you deal with is registered with the Financial Conduct Authority and based in the UK. Its also important that the adviser you are using has the correct qualifications to be able to give you the advice you need. The FCA has a scam smart website which you can visit if you are unsure of a company. However a reputable company will not cold call new clients so if you have a call from a new potential firm, this should raise concerns straight away.
The FCA does not regulate all of the above products and services.
This article is for general information only and is not intended to be advice to any specific person. You are recommended to seek competent professional advice before taking or refraining from taking any action on the basis of the contents of this article.