The way people see retirement has changed over the years. It’s no longer the stereotypical comfortable slippers and a relaxed lifestyle. Indeed, for many, it’s very much a second life – the time to enjoy doing things they couldn’t because they were too busy working and raising a family.
If you’re within a year of retirement, here are ten simple steps you can take that will give you the best possible chance of enjoying your life when you finally decide to stop work.
1. Make sure you have a plan in place
If you haven’t done so already, now is the time to put together a plan for your retirement.
Your plan should include:
- The sort of things you want to do once you finish work
- When you want to do them
- The commitments you have
- The pension and savings you have available to fund your retirement.
You should also include a list of all your regular monthly outgoings, as well as noting any anticipated big future expenditure. This will give you a decent idea of how much income you’ll need, whether you still need to save, and if you need to make any changes to your lifestyle.
Remember, you can update your plan as you go through retirement.
2. Review your current pension arrangements
A large part of your income in retirement will likely come from your pension arrangements.
Make sure you have details of all your plans and get up-to-date values for each. If you’ve lost track of any of your pension details, there is a Pension Tracing Service to help you find missing details.
As well as values and projections for your planned retirement date, also check the full details of the type of arrangements you have. In particular, you should find out how your funds are invested, and what benefits are available.
3. Consider consolidating your different pensions
If you do have a lot of different pension arrangements, consolidating them all into one single plan means you won’t have a whole series of statements to keep an eye on – just one plan with a single view.
Consolidating will make it much easier to keep track of your pension value, especially when you start drawing income from your fund. It also means you can potentially reduce the charges you’re currently paying and could also give you access to a wider choice of investment funds.
However, you should seek financial advice first as you need to ensure you don’t give up any valuable benefits, such as guaranteed income, by transferring out of an existing scheme.
4. Continue making contributions
Even if you’re only a year away from retirement, a final boost to your pension fund is well worthwhile.
The tax relief on pension contributions makes them one of the most efficient ways of saving money. The government adds an extra 20% to any amount you personally contribute if you are a basic-rate taxpayer – that’s immediate growth of 20% without you having to do anything!
Higher-rate tax relief makes pensions equally attractive as you get basic rate relief straight away, and can then claim back higher rate relief through your tax return.
5. Remember, it’s not just pensions
As well as pension arrangements, don’t forget other assets you may have that could form part of your retirement income planning.
If you have ISAs, for example, they can be a very tax-efficient way of taking an income during retirement as you don’t pay any tax when you withdraw money from them.
Other possible sources of income or lump sums could include:
- The value of your property. You may want to consider downsizing to a smaller property once you’ve retired – maybe somewhere quieter or closer to family.
- Other savings and investments such as shares or Premium Bonds.
6. Try to clear any outstanding debts
You should make sure you are as debt-free as possible when you retire.
You’ll likely be earning less in retirement than you currently do while working, so credit card and personal loan repayments will make a real dent in your disposable income each month.
You may have earmarked any lump sum you get from your pension for other purposes, but if you still have hefty debts, you should seriously consider using this to clear them.
7. Check your State Pension entitlement
Although it’s unlikely to be enough to live on, the new State Pension of £175.20 per week (2020/21) provides a guaranteed income for the essentials such as utility bills and food, and it increases each year.
The amount of State Pension you receive will depend on the number of qualifying years of National Insurance Contributions (NICs) you have. To get the full amount you’ll need 35 qualifying years of NICs.
If you have gaps in your NICs, you may not receive the full amount. You can request a forecast to find out exactly how much your State Pension will be and when you’ll get it.
8. Review your investment strategy
How you invest your pension fund, and any other savings you have, is an important factor in determining the income you could receive during your retirement.
A sudden drop in value could impact on your plans to retire as it may take time for your fund value to recover to where it was. You may therefore want to consider starting to move some or even all your fund to lower-risk investments as you move towards retirement.
Investing can be complicated, so if you aren’t sure about different investment strategies, we’d strongly recommend you take financial advice.
9. Check you have an emergency fund
Regardless of how you invest your savings, stock market turmoil, such as the last few months, can impact on all investments – even if it’s only for a short period.
Taking income from your pension at this time can be expensive, as you’ll cash in more investment units, and therefore miss out on future growth.
One way to avoid this is to have an emergency cash reserve that can provide you with an income for a short period while you wait for markets to recover. A very rough rule of thumb is to have three months’ income in cash as an emergency fund.
10. Take financial advice
With so many choices available to you at retirement, taking professional advice can help you to avoid costly mistakes. Financial advice can help you to ensure you have enough to last you through retirement, that your income is drawn tax-efficiently, and that you can live the life you want with the money you have.
Please get in touch if you’d like to find out more about how we can help.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
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.