10 tips for those retiring in 2019
If you are planning to retire in 2019 and have a defined contribution (DC) pension, you will have a number of important decisions to make.
A DC pension (also known as a money purchase scheme) is made up of individual and employer contributions and does not pay out a set amount during retirement.
It may feel like you have a mountain to climb as you approach your retirement date, but fear not: it doesn’t have to. Here are specialist financial advice firm Wealth at Work’s top tips to ensure a smooth retirement.
List all of your assets
Before you make any decisions about your retirement, work out which assets you have and what they are worth. In addition to your pensions, which may include defined benefit (final salary), and defined contribution (money purchase) pensions, you may also have other assets such as ISAs, shares and general savings. All of these should be considered as potential sources of retirement income.
Work out how much you need in retirement
Think about how much income you are going to need in retirement, including essential income to meet your day-to-day living expenses, such as household bills, and discretionary income for things like holidays and hobbies.
You also need to think about how this income requirement may change over time. For example, income needs are widely believed to follow a ‘u-shape’ in retirement. The first phase is the most expensive because this is when you are most ‘active’.
Spending often falls after a while in what is known as the ‘passive’ phase, as people become a little less active and perhaps cut back on areas such as travelling. However, costs then may go up later in retirement in the ‘supported’ phase, if extra care and support is required.
Think about how to access your pension income
If you have a DC pension, you need to decide how to access your income. You can choose between income drawdown, buying an annuity or taking it as a cash lump sum. It doesn’t have to be just one choice as you may opt for a combination of options.
Don’t worry if it sounds overwhelming – financial education and/or regulated financial advice can help you to understand exactly what each option means and which approach best suits your needs. Speak to your employer about any support that they provide and visit www.pensionwise.gov.uk.
Don’t pay unnecessary tax
Don’t forget, typically only the first 25% of a DC pension is tax-free (the calculation for a DB scheme will be different); the remaining 75% is taxed as earned income. You could find yourself paying more tax than you need to if you don’t plan carefully.
For example, some people have taken their pension as a cash lump sum, not realising that it could make them a high rate tax payer! Make sure you look at the options that are available.
For example, it may be more tax advantageous to take income from your non-pension savings first. Also, you may be better off taking a smaller amount each year from your pension, and then top it up with withdrawals from your ISA, as this is paid tax-free.
Carefully consider whether you can really afford to retire
Do you have enough put aside to be able to afford to retire? Alternatively, do you need to work a little longer or perhaps part-time?
Research has found that most people live longer than they expect they will, so keep this in mind when doing your sums. For example, the Institute for Fiscal Studies found this year that those in their fifties and sixties underestimate their chances of survival to the age of 75 by around 20% and to 85 by around 5% to 10%.
Make sure your pension beneficiary details are up-to-date
In 2015, the government abolished tax on death on DC pensions for anyone who dies before the age of 75. This means that any remaining pension can pass onto your beneficiaries tax-free, subject to not exceeding the current £1.03 million lifetime allowance.
Make sure that you shop around before you make any decisions about purchasing any retirement products. The financial regulator, the Financial Conduct Authority (FCA), found this year that those who go into income drawdown could increase their annual income by 13% by switching from a higher cost provider to a lower cost provider.
Try to do as much research as possible to ensure you select a retirement option that best suits your needs. This means finding a solution that enables you to access the right amount of cash as and when you want it, and for as long as you need it.
Consider regulated financial advice as an investment
Many people are concerned about the cost of regulated advice without realising that when you buy retirement products, such as annuities, through online brokers, there are commissions to be paid which can cost just as much, if not more than getting advice.
In fact, getting regulated advice should be seen as an investment; research from the International Longevity Centre carried out in 2017 suggests that ‘affluent’ individuals who receive advice are on average £30,882 better off when it comes to pension income than those who don’t take advice, and those who are ‘just getting by’ are on average £25,859 better off.
This is because an adviser will look at all of your assets, work out the most tax-efficient way for you to fund your retirement and then put a bespoke plan in place for you. This will also give you the benefit of consumer protection for the advice given, as well as a retirement plan tailored to your individual needs.
Protect yourself from scams
The Pensions Administration Standards Association estimated last year that pension savers have lost more than £1 billion to scams. So, whatever you’re planning to do with your retirement savings, it’s really important to check whether any company that you’re planning to use is registered with the (FCA) https://register.fca.org.uk/.
You can also visit the FCA’s ScamSmart website which includes a warning list of companies operating without authorisation or running scams www.fca.org.uk/scamsmart.
What is right for you?
It’s now easier than ever to access your retirement savings. This is great news, but it’s also a frightening prospect because of the potential risks involved in managing your life’s savings. These include being scammed, paying more tax than necessary or running out of money during retirement. This is why it’s crucial that you take your time to research and fully understand all of your options, so that you’re armed with all the facts to make informed decisions that best suit your lifestyle choices and needs.
Jonathan Watts-Lay is a director at Wealth at Work