Thinking about retirement? Here’s what you need to know
In an ideal world, you’ll have left your debts behind you, and now have a reasonable pot – either through a personal or workplace pension – to support you through your later years. Your first step is to look at whether your retirement plans are realistic.
1. Your pension pot has to last you a long time – potentially twenty-plus years, and you might have to pay care home fees out of it as well. To get a sense of how much you will need, this Fidelity tool is useful. It allows you to adjust your income based on your expectations of retirement, depending on whether you fancy long holidays or just a bit of gardening.
2. You then have to take a look at how much you have. For most people their pension pots comprise:
- The State Pension: check your State Pension entitlement here
- Your workplace pension: get an updated valuation from your HR department. You should also rummage through drawers to dig out old schemes. Failing that, you can always try the government’s Pension tracing service.
- Any personal pensions
- Any other savings: this might be ISAs, insurance bonds, money realised from the sale of a second property, or from downsizing an existing property.
Armed with this information, you can decide whether retirement is a realistic prospect, or whether you are going to have to work for a few more years. Deferring the state and/or personal pensions will give you a bigger income.
From there you have the thorny issue of how to invest your pension pot to generate an income. This can be a time when a one-off session with a financial adviser can be very valuable. Paying £300-£400 to sort out your finances so that you can enjoy your retirement time without fear of running out of money is a price worth paying. To find an adviser look at Unbiased, Vouched For and The Institute of Financial Planning – many will offer a one-off ‘at retirement’ service.
The Pensions Advice Allowance which came into effect in April 2017, allows savers to take up to £500 in three separate tax-years to put towards pension advice. However, not all pension providers offer this service due to low demand so it’s best to check first.
Everyone can take 25% of their pot tax free and you can do what you like with this. Although you can take out more than this in cash if you wish, anything over this 25% level will be taxable.
From there, you have two main choices with the rest of your pot: buy an annuity, or buy a drawdown product.
1. Annuities: here you swap your pot of cash for an income stream for life. The income you receive is linked to the income available on government bonds, which in turn moves with interest rates. If you live a long time, they are good value, but if you die just a few years into retirement, in most cases, the pot is lost completely.
2. Drawdown – this is where the money stays invested in stock or bond markets and retirees take an income from the dividends produced by companies, or the interest available on bonds. The upside is that you, or your heirs, have got something left over at the end and you can continue to benefit from the growth in the stock market. However, it means taking the risk of stock or bond market volatility.
It also means you need to decide how that money will be managed. This can be complicated, though some platforms have off-the-shelf drawdown portfolios.
It is worth remembering that it doesn’t have to be one or the other: it can be good to use an annuity to ensure that your bills are paid, while keeping some money invested to generate stronger growth and protect against inflation. This is an important decision to get right. Unbiased’s handy ‘at retirement’ checklist can help focus your thinking.