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BLOG: How to financially prepare for the transition into retirement

BLOG: How to financially prepare for the transition into retirement
Your Money
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Your Money

Retirement marks a significant and exciting new phase of life for many – offering the prospect of newfound freedom and the time to pursue long-awaited passions. However, with this comes a new set of priorities.

Everyone will approach this transition in their own way, with some eagerly counting down the days and others slightly more reluctant to leave the routine of the working day. Regardless of the approach, everyone reaches retirement at some point.

And this means that everyone must take the time to consider their financial preparedness – a task which can admittedly be easier said than done.

According to the Pensions and Lifetime Association, research suggests that 77% of savers don’t know how much income they’ll actually need to secure the lifestyle they want in retirement. Meanwhile, only 20% are confident they are saving enough.

Additionally, as we look forward to enjoying the benefits of improved healthcare and overall wellbeing, there’s a financial twist to consider – the chance of outlasting our retirement savings. The idea of living longer and healthier lives is great, but it comes with a challenge: How do we make sure our money lasts as long as we do?

The question of longevity

Everyone will have different ideas of what a dream retirement looks like. Yet one thing that everyone probably agrees on is that after decades of hard work and saving, Brits deserve to achieve their retirement goals.

However, recent IFS data reveals a stark reality: 60% of middle-earning private sector employees contributing to a pension save less than 8% of their earnings. An alarming 90% fall short of the recommended 15% suggested by the Pensions Commission.

At the heart of these financial intricacies lies the obstacle of longevity risk – the possibility of outliving one’s investments, savings, pensions, annuities, and other sources of retirement income.

According to the Office for National Statistics (ONS), life expectancies in the UK are set to continue to increase, with those currently aged 65 predicted to live another 20 years. As life expectancy increases, retirement income must stretch over an extended period, intensifying the need for strong financial planning.

Managing the transition

To begin, it’s a good idea to reflect on their current situation. This involves a quick inventory of pension savings and investments to ascertain current wealth, taking into account any debt and making sure to track down any potentially lost pension pots.

You should then establish a timeframe for when you may begin winding down from work and ensure you have a clear understanding of the type of lifestyle you want to enjoy in retirement and how funds in your current state will enable you to achieve this – allowing for an effective budget to be made.

An approach for some may involve gradually reducing work hours or transitioning to a less demanding career. This can not only ensure a smoother shift but also creates opportunities to boost income post-retirement.

Currently, 3.6 million older people in the UK – a 12% increase since 2021 and a 56% increase in the past two decades – are now working part-time.

The transition isn’t one-size-fits-all. Whether choosing a phased approach or immediate retirement, a personalised financial strategy aligned with individual goals and risk tolerance is paramount.

The right strategy and product

Critical to a sound strategy is aligning financial products with one’s goals, financial position, and envisioned retirement.

In times of financial uncertainty, individuals often seek certainty, and for retirees, annuities present a path to stability. These retirement income sources, purchased with part or all of one’s pension, offer a guaranteed income for life for a set period.

High annuity rates, influenced by the interest rate hikes of last year, have made the product more appealing, providing retirees with a more substantial income in exchange for their pension.

However, the appeal of annuities comes with drawbacks, primarily their inflexibility. Once committed to a specific annuity rate, retirees are bound until the contract concludes, unaffected by positive market shifts or increased interest rates.

Recognising annuities’ limitations, some retirees may find flexible-access drawdowns a better fit.

While drawdowns expose retirement savings to the potential risk of market fluctuations, they offer growth potential alongside economic recovery. This flexibility enables retirees to navigate the uncertain financial landscape with greater agility.

Choosing between annuities and drawdowns is contingent on individual factors – financial situation, retirement goals, and risk appetite. This underscores the importance of seeking independent financial advice.

An independent financial adviser will develop a retirement plan to suit an individual’s needs, factoring in their future goals, and, of course, pension savings and assets. They have the knowledge and expertise to analyse that person’s unique set of circumstances and make tailored recommendations to help them secure the best retirement outcome possible.

Getting ready for retirement is all about mapping out your financial path and making smart choices, considering both the complexities of money matters and the possibility of a longer retirement. Whether you lean towards annuities, flexible-access drawdowns, or another form of asset, having a personal financial strategy acts as a compass towards the right retirement for that individual.

The evolving landscape, marked by a shift towards part-time work and changing retirement perspectives, underscores the need for adaptability. Independent financial advice can be pivotal in offering tailored solutions for a secure and fulfilling retirement.

Meanwhile, proactive planning is key to ensuring a smooth transition that aligns with individual goals, paving the way for a satisfying post-working life.

Lily Megson is policy director of retirement income specialist My Pension Expert