How to prepare for retirement
You’ve been saving for retirement for most of your working life, but there are quite a few things to consider before you retire.
Most people have a vision of how they would like their retirement to pan out. It could include travelling more, making the most of your hobbies and pastimes, or simply spending more time with family and friends. But what steps do you actually have to do to access your pension, and what decisions do you need to make before you get there? In other words how do you prepare for retirement?
There are lots of questions to ask and consider when planning your retirement. Here we take a look at some of them.
How much state pension will you get?
A good starting point is to know what you are going to get from your state pension, as this will be part, or in some cases all, of your retirement income.
The full rate of the new state pension is £221.20 a week but the amount of state pension you get depends on your National Insurance record. You can check your state pension forecast to find out what you are currently in line for. The state pension forecast also shows your National Insurance record.
In most cases, you will need more than 35 qualifying years to get the full rate of new State Pension and if your forecast shows you fall short, you may want to add further National Insurance qualifying years.
Can you afford to retire?
You then need to ask yourself whether you can afford to retire. The answer to a great extent depends on the kind of lifestyle you aspire to.
Research from the Pensions and Lifetime Savings Association (PLSA) shows what kind of lifestyle you could have at different income levels. A basic retirement would need £14,400 per year for a single person, or £22,400 for a couple. For a comfortable retirement, it suggests that you would need £43,100 per year (or £59,000 for couples).
Obviously, your state pension will make up some of that income, but analysis by Quilter for Money Week suggests that a single person would need a pension pot worth £459,000 to get a moderate level of income from an annuity, rising to £738,000 for a comfortable retirement.
The MoneyHelper pension calculator can help give you a forecast of whether you are on track to achieve your target income in retirement. And our previous article suggests ways you can get your pension in shape in the run-up to retirement.
If you need help with boosting your retirement savings to meet your retirement income needs, you could discuss your situation with a financial adviser.
Should you consolidate your pension pots?
Most people end up with several pension pots through job changes over the years and it’s easy to lose track of some of them. A recent study carried out by the Pensions Policy Institute (PPI) found that there is £31.1 billion lying in lost, inactive, or unclaimed pension pots in the UK.
If you think you’ve lost any pension pots, you could use the government’s pension tracing service to track them down.
It often makes sense to combine your pension pots, as by doing so you could save time, administrative hassle and potentially costs. It can also help by giving you a better sense of what you have, and this can have a big impact on your retirement decision making,
However, there are some circumstances where it may not make sense – for example if you are or have been a member of a defined benefit scheme.
Transferring a pension is not always a straightforward decision, so it can pay to take advice before you act.
What should you do with your tax-free cash?
When you retire, you can take 25% of your pension pot as tax-free cash. However, you can also opt to take it in instalments. A lot could depend on what you want to use the money for. Perhaps you want to use it to pay off the remainder of your mortgage before you finish full time work, go on a long overdue holiday, or simply switch the money into an ISA to generate some extra tax-free income. Alternatively, you might prefer to use the money to support your lifestyle over a longer period of time.
Withdrawing the money in instalments (leaving a proportion still invested) could allow your pension pot to continue to grow, increasing the size of your tax-free portion over time. However, there are a range of considerations for you to take into account and again, getting advice can help with the decision-making process.
Should you buy an annuity or opt for pension drawdown?
Most people these days have defined contribution pensions and when they decide to retire, a couple of main options are available to them – buy an annuity or opt for pension drawdown. Both routes have their pros and cons.
An annuity allows you to swap your pension savings for a guaranteed regular income that will last for the rest of your life. How much you get is determined by the amount of your pension pot you want to exchange, your health and the rate offered by your chosen provider. Payments are guaranteed for your lifetime and there is no investment risk involved.
However, once you’ve arranged an annuity, you can’t alter your level of income or switch to another provider and you can’t pass on income from an annuity after your death unless you arrange this from the outset – for example, by choosing a joint-life annuity.
Others opt for the flexibility of pension drawdown, where you keep your savings invested and take money out whenever you choose. Your pension pot can continue to grow, as it will remain invested and you can alter how much you withdraw, depending on personal circumstances. Currently too, you can pass on any remaining money to loved ones after you die, although this is set to change from April 2027 after last year’s Autumn Budget.
The flexibility of pension drawdown is a big selling point, but you need to manage your investments and withdrawals carefully to ensure your pot lasts for the rest of your life. The value of your pension pot could also take a hit if your investments underperform.
Some retirees opt for a combination of the two, using some of their pension pot to buy a guaranteed income whilst leaving the rest in drawdown.
Deciding what to do with your pension pot is a big decision, and getting financial advice can help you choose the right path for you.
How do you claim the state pension?
Whilst retirement feels like a landmark, you won’t receive your state pension automatically – you have to claim it.
Around two months before you reach your state pension age, you should receive a letter from the Government’s Pension Service telling you what to do. If you don’t receive a letter, call the telephone claim line on 0800 731 7898, where staff will be able to discuss with you what you need to do.
You then need to make the claim, either by filling in a claim form online, or by calling 0800 731 7898 and ask for a state pension claim form to be sent to you.
You also have the option to defer your state pension if you don’t need the money just yet, perhaps because you plan to work beyond retirement age. In return, you will qualify for a higher amount when you do decide to claim. Whether this is beneficial over the long term depends on how long you live.
Getting ready for retirement
As you can see, there are plenty of questions to consider before you retire. Retirement is an exciting time, but the process leading up to it can feel overwhelming.
To help you with the steps to take in the lead-up to retirement, you can get guidance from Pension Wise, the free service backed by the government. Or for more personalised, detailed advice, why not give us a call?
Please note
This article isn’t personal advice. If you’re not sure whether an investment is right for you, please seek advice.
A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless plan has a protected pension age). The value of your investments (and any income from them) can go down as well as up 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.
You should seek advice from your Kellands financial adviser to understand your options at retirement.