Save, make, understand money


Five things to consider before retiring (aside from income)

Paloma Kubiak
Written By:
Paloma Kubiak

For anyone approaching their retirement years, a big concern is likely to be whether or not they have saved enough money. For many, the number one question is ‘have I got enough?’.

Abrdn’s recent Class of 2022 report revealed that just a quarter of people retiring this year feel very confident that they have put enough aside – not only to enjoy, but to afford these years at all.

Those hoping to retire soon of course need to tackle this issue head on to work out whether retiring now is right for them.However, that shouldn’t be where planning for retirement stops.

We look at what else both soon-to-be and current retirees need to consider, from future care costs, to having a plan to pass money onto loved ones…

1) Could flexi-retirement be for you?

For many, gone are the days where retirement meant stepping back from the world of work altogether. Instead, there are an increasing number of retirees who intend to do some sort of work even once they’ve officially ‘retired’.

In fact, out of those retiring in 2022, two thirds (66%) said they don’t plan on giving up work entirely, with the majority actually planning to still work in some shape or form. Abrdn is dubbing this a rise in so-called ‘flexi-retirement’.

One thing that’s encouraging to see is that retirees are continuing to challenge the norms when it comes to enjoying retirement. Whether it be setting up businesses, pursuing a ‘flexi-retirement’ and working part-time, or doing whatever it is that makes them happy, retirement really is what you make of it.

It’s also very important that people prepare mentally for retirement. Retirement is a very exciting time when you will have far more time for friends and family, hobbies and holidays. But it’s important to understand that work and employment provides a lot of social engagement in our lives, and the self-esteem that comes from being needed, and doing a good job. Flexi-retirement is one option to smooth some of these changes over multiple years.

The meaning of retirement is changing for everyone, so don’t be afraid to make retirement what’s right for you when it comes down to it.

2) Navigating the cost of living

Confidence in financial readiness to retire has fallen. The rising cost of living is a key factor in this drop in confidence – with more than a quarter (27%) of 2022 retirees saying they don’t know how to mitigate the impact of inflation on their retirement income.

Retirees planning to rely on their State Pension to fund retirement should review their income plans, amid below-inflation state pension increases this year.

The same goes for those with money held in cash. With inflation currently at 9%, the value of any money sat around in cash is declining in real terms and those relying on it risk running out of money sooner than they may think.

hat’s why retirees need to make clever decisions and seek professional support more so now than ever before, helping to ensure their money is beating inflation and working harder for them.

3) Get on top of your taxes

Retirement brings with it a lot of change – change to your routine and to your income, but also to the tax you have to pay.

After you’ve retired, you still have to pay income tax on any income over your personal allowance, which currently sits at £12,570. This applies to all your pension income, including the state pension.

However, every pension or savings pot you have may be taxed differently and you will need to be strategic with how and when you take withdrawals from each. Before retiring, do your research on how much you will need to withdraw each year and how the amount impacts your tax bracket.

For example, a quarter of your pension pot is usually tax-free, and you’ll pay income tax on the rest. If you’re not sure on the best course to take to ensure you can make your retirement income as tax efficient as possible, consider speaking to a financial adviser for personalised, expert advice.

4) The power in gifting

When it comes to retirement, it’s important to make the most of your savings and make sure you’re meeting your individual needs. However, it is never too early to start thinking about how you can increase the amount you eventually pass on.

Giving gifts is a way to reduce future inheritance tax. There is an annual allowance of £3,000 which lets Brits gift either a single recipient or multiple people up to this amount each year without it being taxed. Alternatively, there is no limit on the number of small gifts, valued under £250 per person, that can be given per year.

For gifts beyond these allowances, there is also a seven-year rule to keep in mind. Your gifts will still be considered as part of your estate, and therefore subject to the tax, if given within seven years of your passing. However, the gifts given seven years or more before you die will be exempt.

Alternatively, you can choose to gift your assets by way of charity donations. This provides more flexibility as you can do so while you’re alive or after you’ve passed, and all donations are exempt entirely from IHT.

5) Care costs

Particularly now that people are living longer, considering the increasing costs of long-term care and healthcare is critical – no matter how far off or unnecessary that might feel right now.

Our research in the Class of 2022 report identified that almost a third (31%) of retirees don’t know how to prepare for care costs in later life, while more than a quarter (27%) have no plans to hold money back for this.
With retirement potentially lasting 30 years or more, it is vital that people are fully aware of how they are going to make their money last. People often think that they will have higher income needs at the beginning when they are fit and healthy and then over time this will reduce, but taking this assumption runs the risk of exhausting their retirement pot too soon.

Although most would prefer not to think about it, it is something that is important to prepare for financially. Seeking help with retirement planning to map out what you’ll need at every step of the way can make what is perceived to be a complex and emotive process much easier to manage.

Colin Dyer is financial planning expert at Abrdn