Research shows that the average Briton spends more time planning their annual holiday than they do planning their retirement. Since 2015 the options available at retirement have opened up. This reflects that retirement is no longer a preordained event at 60 or 65. Instead it is something that most people can choose, both the timing and the pace at which they cease to earn money and live off their savings. While this flexibility is welcome, it also means that individuals have to take more responsibility for the choices they make, many of which will have long term impacts on their standard of living and may be irreversible.
With many decades of experience of helping thousands of families plan for retirement, here are our top tips for success:
- Start to plan for retirement at least 5-10 years before income is likely to be needed, it will enable gaps to be filled and alternative strategies to be fully considered.
- Understand what income needs will be in the future. This should be the goal set for retirement, rather than simply accepting the pension offered from each source. Focussing on future income needs and aiming for that goal, may achieve a better retirement.
- Understand what private pensions and other savings you will have. If you don’t have an up to date record of these, there is a tracing service which can give you the contact details for any you have lost touch with. There is an estimated £3 billion unclaimed in private pensions.*₁
- Get a State Pension forecast. You will need 35 years credits to get a full basic State Pension. You may have an earnings related top up and deductions for years you contracted out. Ensure that all credits have been claimed, for example, if caring for a child or relative. Top up voluntary payments can be made to secure a higher pension.
- Work out what all your pensions will pay and see if there is gap or a surplus, between this and your spending needs. If your pensions don’t automatically provide inflation proofing, remember that you need to take the effects of inflation into account or the purchasing power of your income will reduce over the years.
- You need to plan for a long life expectation to avoid running out of money too soon. You also need to consider what your dependants’ would get if you died first. Some pensions reduce on death of the member. If you are not married or civil partners, they may get nothing.
- While still earning, make the most of tax relief and employer contributions to boost your retirement saving. Up to 3 years relief not claimed previously can be paid in one lump and qualify for tax relief at your highest rate.
- Do not feel compelled to start taking benefits from your pension just because you have reached the age you chose at the start. If you don’t need the income immediately, it can be delayed. Some plans though may offer guaranteed terms which are lost if not taken on a given date.
- Consider all options in terms of flexi access, guaranteed lifetime income. Ensure that all lifestyle and health issues are fully explored, this could gain more guaranteed income. 67%*₂ of our clients who buy an annuity qualify for enhanced terms. Shop around the whole market; do not accept the first pension offered.
Seek advice on whether the pattern of income offered meets your needs. For the majority of scheme members they are likely to be the best option, if personal circumstances make you an exception, there could be benefit in getting advice on alternative strategies.
- Take taxation into account. Be aware that drawing £1 more than the tax free cash via flexi access drawdown will limit future tax relieved contributions to £4,000 per year.
Expect the first pension payment to be incorrectly taxed, as HMRC use an emergency code, be ready to reclaim the overpaid tax.
Spreading tax free cash and taxable income over a number of tax years can increase your net spendable income.
Planning for the longest holiday of your life is important, so consider appointing a retirement adviser who can help you navigate all of these questions to arrive at the retirement income you need.
Director of Public Policy, LEBC
Please remember, no news or research item is a recommendation or advice to buy. LEBC Group Ltd is not responsible for accuracy and may not share the author’s views. If you are unsure of the suitability of any investment or product for your circumstances please contact an adviser. All investments can fall as well as rise in value so you could get back less than you invest. Any levels and bases of, and reliefs from, taxation, are subject to change. Taxation advice is not regulated by the FCA.
*₁ DWP Research Report 697, The Pensions Tracing Service: A quantitative research study.
*₂ 1 LEBC The Retirement Adviser Annuity Market Update May 2018.
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