Last month, we wrote about how to prepare yourself emotionally for retirement. This month we’re focusing on getting your finances organised.
Taking the time to understand what you require and how you can use your assets to achieve this will give you the confidence to begin the next phase in your life with clarity on how you can fund it.
The following 5 points are some helpful suggestions to get you started and do not amount to advice. If you would like us to provide recommendations tailored to your own situation, please contact us to find out more about how we can help with this.
1. Understand what you’ve already accumulated
The first step is to gather information on the pensions and other assets you’ve accumulated so far. This can help you build a picture of the income you could receive during your retirement and options available to you with the plans you have in place now.
- Establish what you’re on track to receive from the State Pension
Start by getting your State Pension forecast from the government website. This will tell you how much you could get, when you can get it, and whether it’s possible to increase it.
- Check for gaps in your National Insurance contributions (NICs)
You can check your National Insurance record on the government website. You can also find out if it’s possible to pay voluntary contributions to make up for any gaps, which could boost the amount of State Pension you receive.
- Track down all your pensions and investments
If you’ve lost track of some pensions or investments but know who the providers are, call them and ask for an up-to-date statement. Or if it was an employer pension, your old employer will most likely be able to help you locate the details.
You can also use the Pension Tracing Service to track down lost pensions.
- Get up-to-date information
The next step is to ensure you have up-to-date information on all your pensions and investments. If you have your last annual statement, this is probably enough to understand the approximate value and any income you might receive in the future.
But there are other important points to clarify so you can make informed decisions.
- Determine whether your existing arrangements are suitable to meet your objectives
Consolidating your pensions and investments can make them easier to keep track of but there are many factors that determine whether your existing pensions or investments are appropriate for you. Some of these may become obvious when you have answers to the questions we refer to above, but there are others we explore below.
2. Imagine how you would like to live your life when you stop working and have more time
Consider what’s most important to you and make sure you build these things into your retirement plan.
Do you have ambitions to travel the globe for the next two decades, or perhaps just a few special trips you’d like to do over the next five years? Is eating out a few times a week important to you or do you plan on taking up new hobbies?
Whether sailing or golf are your thing rather than growing veg and volunteering in a local society will affect the level of income you require in retirement.
3. How much income will you need?
Next, you can estimate how much you’ll need each year to cover this expenditure and your other outgoings.
Comparing your anticipated expenditure with the level of income you’ve estimated can give you a sense of whether you’re on target.
Rather than simply living off the income your investments generate, you may be able to spend some of your capital to cover your cost of living. But this will depend on your aspirations for the future, so should be given careful consideration.
At Life Matters, we build lifetime cashflow forecasts for clients that we call Your Big Picture™. This gives you the clarity to make important decisions such as spending some of your capital as it considers your likely income and expenditure over your lifetime, rather than just the early years of retirement.
4. Consider the options for taking an income from your pensions and investments
Once you understand where your money is and how much you expect to spend when you retire, it’s time to think about how you’d like to receive your income in retirement.
It’s vital to do this several years prior to your retirement as the decisions you make could affect your current investment strategy.
Start by considering how much risk you’re comfortable with. Are you prepared to see the pot of money you’ve accumulated fluctuate through your retirement? If so, can you afford for it to fluctuate? Or would you prefer to receive a guaranteed income for the rest of your life?
If your provision for retirement is in a final salary pension, then the company guarantees to pay you an income for the rest of your life. Often this income will increase over time, meaning it will keep inflation at bay.
For those that have accumulated their wealth in either money purchase, or personal pensions, there are broadly two options when it comes to drawing your income. Either a flexible drawdown arrangement or an annuity.
An annuity provides a guaranteed income for the rest of your life. You can opt for this to increase with inflation or for a level amount, which means the amount you can buy with the income will reduce over the long term.
While the importance of keeping pace with inflation should not be underestimated, selecting this option will mean your income at the start of your retirement will be lower to reflect this.
Although it is possible with an annuity to add benefits for your spouse in the event of your death, this is likely to reduce the income you receive.
With this more flexible approach, you keep your money invested in a pension and draw what you need when you need it. This is a more complex solution and carries investment risk, along with the possibility of running out of money if you spend too much in the early years, making it very important to seek professional advice.
However, the flexibility it offers and the opportunity to pass any remaining balance of your pension to your loved ones in the event of your death, makes it the more popular choice.
5. Think about tax planning for both your future income and future generations
Planning for a tax-efficient income through your retirement is a complex area that has long-term implications but can make a big difference. We have several clients receiving an annual income to their bank account of £80,000 or more, who, through our careful tax planning, pay only basic-rate tax.
We find that without advice, people are inclined to spend all their cash first, then their non-pension assets such as ISAs and shares, and lastly their pensions. There are many tax advantages of using a combination to generate the most tax-efficient income for you over the long term.
For example, if you’re retiring several years before your State Pension kicks in and don’t have income from other sources, you can use your personal allowance (currently £12,570) to draw income from your pension tax-free.
The decisions you make in retirement about drawing your income will also have implications for your loved ones when you are no longer around.
At Life Matters, we’re passionate about helping people have the best retirement they can. Working with a professional, you have someone accountable for helping you make the best, informed decisions for you. If you’d like to have a chat about how we can bring clarity to your finances, please email us at firstname.lastname@example.org or call 01202 025481.
Please note that the content of this article is for information purposes only and does not amount to advice. Any decisions made regarding your finances need to take into account your unique circumstances and aspirations.