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Five tips for getting ‘retirement ready’

Written by: Rob Morgan
Retirement can be a time of great change in your financial circumstances. Here are some tips on how to prepare.
  1. Gather as much information as you can

As your retirement draws closer, it’s important to have all the facts so you have the best possible plan. A good place to start is by working out what income you can generate in retirement from your pension pots, the State Pension and any other income you may have. Remember to take account of any tax you’ll pay.

To see how much state pension you might get, and when you are due to start receiving it, you can use the government’s online calculator. For other pensions you have built up over the years look at your pension statement – your provider should send you this once a year. If you have paid into more than one pension pot you will need to contact each provider separately to find out how much is in each one.

A pension from a defined benefit scheme (also known as an employer’s salary-related pension scheme such as a final salary or career average scheme) will provide a certain amount of income depending on your salary and years of service. For personal pensions it will depend on the value of your pot and how much you can then secure via an annuity or draw via pension drawdown so you should to ask for quotations based on your requirements. Remember to shop around for the best annuity deal and check that all the health details you’ve used to get quotes are up to date.

  1. Check your pensions against the Lifetime Allowance

The maximum pension savings you can build up without incurring a tax charge when you draw out your money (and without leaving a tax charge for your beneficiaries if you die before age 75) is £1m. If your pension pot is worth more than this, tax is due on the excess amount of 25% on income and 55% on cash lump sums. Defined benefit pensions are usually valued at 20 times the income you get in the first year plus your lump sum – but you should check this with your pension provider.

  1. Weigh up how best to take benefits

If you have built up a defined contribution pension (a personal or workplace pension where you have built up your own pension pot) it’s up to you to decide what you do with this. Provided you’re 55 and over you have complete freedom. You can leave it where it is, carry on contributing, use some or all of it to provide yourself with a guaranteed income in retirement (via an annuity), take some or all of it as cash or a combination of these.

The choices you make will depend on your particular situation – how much retirement income you need, what other sources of income you’ll have, your health, how comfortable you are taking risks and how much tax you’ll pay. You can usually take up to 25% of a personal pension as a tax-free lump sum. The rest can be used to provide you with an income and/or irregular lump sums, both of which are taxable as income.

It’s often a good idea to have some secure income via the State Pension, defined benefit schemes or annuities that you can rely on to pay for basic living expenses and last your whole retirement. Once that’s in place, you can consider more flexible options that can help with changing needs during retirement.

  1. Adjust your investment strategy

In addition to any pension drawdown, you may have ISAs or other investments that you are planning to use to generate income. Ahead of retirement these will need to be reviewed to ensure the investment strategy is appropriate. The asset mix may require tweaking, for instance replacing growth-orientated areas with investments that pay a higher level of income. If you invest in funds you may need to substitute units that reinvest income for you (accumulation units) with those that pay it out (income units).

  1. Consider advice or guidance

Many pension options are irreversible so it’s important you choose wisely. Therefore we recommend you take professional financial advice or seek appropriate guidance if you are at all unsure. Having an expert review your situation can give you confidence that decisions made are right for you. Pension Wise, the Government’s free and impartial pension guidance service can also help you understand your pension options.

Rob Morgan is pensions and investments analyst at Charles Stanley

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