Preparing for retirement: what to avoid, how to boost your income, access your pension and more
Building up a healthy pension pot is one thing, but it's vital you don't undo all your hard work when your actual retirement draws near.
Retiring with a plan: don't undo your hard work
After many years of saving, it's hugely rewarding knowing you're well on your way to enjoying a comfortable retirement when you finally decide to pack it all in.
But it's vital you don't become complacent: from moving all your money into low-risk investments too soon or landing yourself with a massive tax bill, it can be worryingly easy to undo so much of your hard work if you don't have a proper strategy in place.
In this guide, we reveal everything you need to know so you can put together the best retirement plan for your needs.
Know what you'll spend & how much you'll need
While you'll no doubt know your current spending habits inside out, it's worth paying particular attention to where your money will likely be going every month.
It'll vary from person to person, but wealth management firm Fisher Investments UK says most of us will face the same monthly costs, which fall into two pots: non-discretionary spending and discretionary spending.
This is spending you don't have a lot of control over. There may be some wiggle room, but for the most part, you can't avoid these costs.
- Living expenses: Day-to-day, how much does it cost to maintain your lifestyle? You'll want to consider everything from shopping and fuel to heating bills. If you aren't planning on relocating in retirement, you probably have a good idea of what these expenses are already.
- Debt: This can be credit card debt, your mortgage or loans. Anything you owe needs to be accounted for when identifying your expenses. That's because you'll have to keep paying off the main loan and making periodic interest payments.
- Taxes: Whilst taxes are often lower for retirees, the Government still wants its cut. It pays to keep money set aside to settle your tax bill at the end of the year.
Once you get past basic living expenses, you have to account for discretionary spending. Discretionary spending depends on your personal situation.
For example, you may view your TV package as discretionary, but holidaying as a required, non-discretionary expense. This is just an example, but the message is that if you have a hobby or another expense you can't imagine living without, you'll need to include it in your non-discretionary expenses.
Here are some of the more common discretionary items in retirees' budgets.
- Travel: Many people look forward to travelling in retirement. This could include visiting grandchildren or spending time overseas. If you've been thinking about a dream holiday for years, now could be an ideal time to budget for it.
- Hobbies: Retirement is a great time to restart old hobbies or pick up new ones. Ready to master fly casting or finish researching your family history? Hobbies almost always incur some costs, even if many are small.
- Luxuries: This is partly subject to your own budget and definition of luxury. But whether you enjoy fine wines or simply meeting friends for coffee most mornings, you'll need to factor non-essential purchases into your expenses.
- Children and grandchildren: For many, this last category includes aspects of all the others. Your family could require travel and luxury purchases, and be your favourite hobby all at once. If you need a generous budget to make children and grandchildren a focus in your retirement, you'll need to think about how much cash flow you'll need to support it.
How much money will you need?
Again, this will vary from person to person, but it’s also worth exploring how much on average is needed for a comfortable retirement.
According to research from retirement firm Key, the average pensioner needs £11,830 a year. Of course, this varies not just by lifestyle but also based on where you live in the UK.
For example, to be a pensioner in the North East costs a massive £3,870 a year less compared to being a pensioner in the South East.
Remember that’s just on necessities though.
How much do you need in order to live a little after you’ve packed up work?
A study by Tilney in 2017 suggested that the average pensioner household spends £26,500 every year between the ages of 65 and 75.
Given that the full Basic State Pension for a couple pays just under £13,500 a year, that’s a significant amount that will need to be covered by some form of personal pension saving.
It’s also worth noting the average Brit is expected to live until around 81, according to the most recent figures from the Office for National Statistics.
You can learn more about how much you'll need to retire based on your needs in this handy analysis.
Lots of work to be done
Unfortunately, the average pension pot is worth £62,000 after a lifetime of saving, so you’ll probably need to find ways to boost your income if your pension is worth less than this.
Thankfully, there are a few things you can do besides delaying retirement or committing to a frugal lifestyle, although the former is a good way to boost your income.
But first, it’s vital you work out how much income you have and how much you spend, as well as identify ways you can cut costs. You can try and save more in any pension pots and ISAs but you should be cautious when investing by having up to 50% of the portfolio invested in equities.
On top of this, you should also make sure you have an emergency savings fund and you should consider an annuity, which is a guaranteed income for life (although rates are currently poor).
Unfortunately, if you’re still struggling, you may have to consider significant measures, including downsizing or equity release although you should do your research first.
What if I have mid-level savings?
Even if you have higher savings than £62,000 in a pension pot, it might be worth working longer and boosting pension contributions, especially if you’re getting contributions from your employer.
Patrick Connolly, head of communications at Chase De Vere, encourages this as a way to boost any income that someone can get during retirement.
Again, annuities can be a useful guaranteed source of income either for life, or for a fixed period of time, so you can have more flexibility with how you access your money.
As we mentioned before, it’s best to only have up to 50% of your portfolio invested in equities with the rest focused on fixed interest assets.
What if I have a decent-sized pension pot?
If you’re lucky enough to have a healthy pension pot, a key focus is to make sure you’re not surrendering large amounts to the taxman.
One way to do this is to consider offering gifts or financial support to family members to reduce the size of your estate and lower your Inheritance Tax (IHT) liability.
But only do this if you don’t need this money yourself! To find out more about IHT, check out How to cut your Inheritance Tax bill.
Connolly recommends that people with decent pension pots access it via drawdown and keep the rest invested, so they can take out cash when needed and keep the tax bill as low as possible.
He also believes if you’re accessing your pension in this way, that you can take a riskier strategy for potentially larger returns by possibly investing up to 70% of the portfolio in equities.
But it’s vital that you’re comfortable with this amount of risk and review any investments regularly, as well as be flexible with the investment strategy if it’s not working for you.
What to avoid when you retire
One of the best ways to avoid any nasty surprises during retirement is to have a plan, so you should figure out what your priorities are beforehand.
For example, would you like to stop working completely and if so, how will you fill your time?
You should make sure you have enough money to meet your retirement needs by compiling a budget and looking at ways of boosting your income while avoiding becoming dependent solely on your pension.
By doing this, your money should last longer, and it may also reduce the amount of tax you pay.
Of course, this isn't the only thing you should consider.
Check out Common mistakes to avoid when you’re about to retire to find out more.
How to have a flexible retirement
Before you retire, it’s vital to understand that you don’t need to quit your job full-time and automatically access your pension.
You can have a flexible retirement that varies according to your needs.
So, you can choose to work longer or go part-time while still contributing to your pension. You can choose to draw an income and work at the same time, or even defer your State Pension (more on this later), which could increase the amount you receive.
But you should check the T&Cs of any pension scheme if you plan to continue working. The scheme may have specified an age where you can stop accruing benefits or a maximum amount you can contribute to your pension, based on your salary.
Changing jobs could impact any benefits from your pension, so you should check this before making any major changes.
It’s also a good idea to get financial advice before accessing any pensions as it could affect the amount of tax you pay or the amount you can contribute to your pension in the future.
Tips on how to retire early and boost your income
If you want to retire in your 50s, instead of waiting until State Pension age (currently 65), there are many things you can do to plan ahead.
For example, if you start saving while you’re young, you can benefit from the positive impact of compounding.
Of course, this may not be suitable as not everyone can start saving from a young age.
A good place to start when trying to accumulate a decent-sized pension pot is to join a workplace pension and boost your contribution beyond the minimum of 5%.
You could also start a personal pension and monitor the performance of any funds, as well as switch these to ones with lower fees as these can eat away at your money over time.
On top of this, paying down debt can help you retire earlier.
The advantages of delaying certain benefits
It sounds odd, but in some cases, delaying the use of certain benefits can help to boost your income.
By pausing your State Pension payments, you could increase your payments by up to 10% (or 5.8% if you turn 65 after 6 April 2016) for each year the pension was suspended.
For example, you could get approximately £500 extra per annum for around 17 years (based on the weekly State Pension of £168.60) if you pause payments (£8,767.20) for a year.
Or you could get a lump sum plus interest of at least 2% above the Bank of England’s Base Rate although this is only available to those who hit State Pension age before 6 April 2016.
But whether you benefit from pausing your pension depends on how much longer you expect to live after continuing to receive the payments again.
You should also make sure you won’t actually need that money during the time your State Pension is on pause.
It’s worth flagging that by pausing the State Pension, you may delay any additional State Pension, while the amount you get from other benefits may be affected.
What benefits can you take advantage of?
Before you retire, it’s worth understanding what benefits you can enjoy as it could save you a lot of money.
Shocking research from retirement firm Just Group recently revealed nearly half of eligible pensioner homeowners don’t claim any benefits – and are missing out on an average of £1,423 a year!
You may be able to get free prescriptions, eye tests or a bus pass, as well as money off your Council Tax or energy bills.
To find out the full list of benefits, check out Pension benefits & entitlements: Council Tax Reduction, Savings Credit, Pension Credit & more.
It’s worth mentioning Pension Credit, which helps to top up low incomes to a minimum of £167.25 for one person and £255.25 for a couple.
Pension Credit comprises Guarantee Pension Credit and Savings Credit.
Even if you have a pension, savings or own your own home, you may be eligible for an additional payment towards your retirement via Savings Credit.
Want to know more about Pension Credit? This guide reveals everything you need to know.
Getting the most out of your State Pension
Retirees are often warned that they should not depend on their State Pension but may be unaware of how some common mistakes can impact how much they receive.
For example, some women may miss out on a portion of their State Pension entitlement to the tune of £231 a year if they don’t correctly fill out out a Child Benefit form – or choose not to claim it.
But other people are also at risk of losing out on thousands of pounds by claiming State Pension when they don’t need it and not checking their National Insurance record for gaps.
As you need 30 ‘qualifying years’ of National Insurance contributions to access the full basic State Pension, any errors on the Government’s part could cost you dearly.
You can check your National Insurance record online.
What are your options at retirement?
You can use your pension to buy an annuity to get a guaranteed income for life (or for a set amount of time if you prefer).
Funds are paid out by an insurance firm, but the amount can vary depending on your age, gender, health, interest rates, size of your pension pot, type of annuity and where you expect to live when you retire.
Annuities can be chosen based on your needs as you can use them to make fixed payments for a set amount of time, link them to the stock market or make your payments increase every year to offset inflation.
They can even be used to pay your partner after you die, and you may get more money if you’re in poor health.
But it’s worth getting financial advice and doing your research as annuity income rates are very low (at the time of writing) and they may not be ideal for those who want more flexibility over their income.
You could reinvest your pension pot into funds that are designed you give you a regular income during retirement, which is known as income drawdown.
While your income could grow, there’s the risk your pot could fall in value, so you won’t get a guaranteed income, which is possible by using an annuity.
Check out our guide on income drawdown (below) or see how it compares to other ways to access your pension.
Withdrawing a lump sum or smaller sums
It is possible to take a lump sum from your pension pot, with the first 25% tax-free. Alternatively, the first 25% of each withdrawal is tax-free via an uncrystallised funds pension lump sum.
The rest is treated as income and taxed accordingly.
While you can get hold of your cash and have the flexibility to do what you want with it, you could be hit with an emergency tax bill.
If you take your whole pension pot as cash, you’ll have to make sure it lasts throughout retirement and you can’t get a guaranteed income for your spouse after you die.
By withdrawing your whole pot, you’ll also probably be pushed into a higher tax bracket, so you may end up with a huge bill.
Self-Invested Personal Pensions (SIPPs)
SIPPs offer a wider range of investments compared to other personal pensions, by allowing you to invest in UK and overseas stocks, unlisted shares, investment trusts, property and land.
You can make your own investments, so a SIPP might not be for everyone although you’ll also benefit from tax relief from the Government.
So, if you contribute £800 into a SIPP, the Government pays in £200 if you are a basic rate taxpayer. If you’re a higher rate taxpayer, you can claim tax relief from HMRC.
While you can’t access a SIPP until the age of 55, anyone under the age of 75 can pay in and get tax relief.
There are two main categories of SIPPs, which are known as ‘full’ or ‘low-cost’.
If you get advice on your SIPP investments, this is known as a full SIPP.
You can get access to the widest range of investments, but you also have to pay higher fees, while a low-cost SIPP doesn’t offer any advice although they tend to offer lower fees.
How to get advice
It’s strongly advised that anyone considering retirement gets guidance on what they should do with their pension pot, especially following the introduction of pension freedoms in 2015.
There are a few options available to retirees wanting to access their money, including annuities, income drawdown and withdrawing either all or part of their cash.
Regardless of which option you choose, you should understand the tax implications and what to avoid to make sure your money lasts throughout retirement.
Unfortunately, even with advice, you may be offered guidance that is expensive and not personalised to your needs.
You can check out Pension Wise, which offers a breakdown of the pros and cons of each option for free – but they won’t be able to advise you on what the best option is for your circumstances.
If you want personalised advice based on your own circumstances, you can use an Independent Financial Advisor (IFA).
But before you decide on an IFA, it’s worth meeting them to find out whether they’re right for you. It’s a good idea to check out how much experience they have, qualifications, what services they offer and how much they charge.
You should also make sure you assess any advice offered before acting on it.
If you decide to use an IFA, you could be charged a fixed fee, an hourly rate or a percentage of your assets for any advice.
We have revealed a rough estimate of what you can expect to pay based on a few examples, so check out this guide on pension advice to find out more information.
What should I consider when accessing my pension?
You can take up to 25% of your pension tax-free from the age of 55 but it’s worth thinking about whether you need it, as your money could lose value if you stick it into a bank account.
Check out this guide on how to access your pension to find out how much value your cash could lose in real terms by doing this.
It’s a good idea to only take money out of your pension if you need it, particularly as the amount you can save may fall dramatically under Money Purchase Annual Allowance (MPAA) rules, plus you could end up with a hefty tax bill.
There are other options for income as you could use an ISA to top up your income. Alternatively, if you can have small pension pots worth less than £10,000, you could cash them in without triggering MPAA.
It’s worth remembering that you can usually pass on any pensions tax-free to your loved ones, so if you don’t use it all, it could benefit someone else after you pass away.
Investing in retirement
According to the Office for National Statistics, the number of centenarians in the UK jumped 85% between 2002 and 2017. If you want to ensure you have enough money, you could consider investing.
Similar to the strategy for drawing income, knowing how much you’ll need every year for your ideal retirement is key.
When you decide to use any investment as income, it’s worth considering spreading the withdrawals over several years or withdrawing dividends to keep your tax bill low.
It’s also worth reviewing your portfolio every few months and making any adjustments if necessary.
How to get extra cash during retirement
If you’re planning to retire and still have debt to clear, you have a few options.
Check out this handy guide that can help you sort your finances out. This includes using your savings, cutting back on your budget, continue working, claiming benefits or downsizing.
You could consider using equity release to access cash tied up in your home, but this has its own risks.
While equity release has been growing in popularity over the last few years, it’s not suitable for everyone and it could affect how much you can pass on to your loved ones when you die.
If you want to find out more, our guide reveals everything you need to know, including how equity release works, costs, main providers and how much interest you could expect to rack up.
What to do when you retire
As the majority of people work their whole lives to save enough for a cosy retirement, it’s easy to overlook what you should actually do when you retire.
It can be overwhelming going from a full-time job to having lots of free time, so it’s worth planning ahead to make sure you’re fulfilled.
For example, do you want to go part-time or pursue a different career if you’re unsatisfied with the work?
Not only would this offer a more comfortable transition to a full retirement, you could save more money.
If you’re happy to give up work completely, it might be worth thinking about how to fill your time. You could consider a new hobby or even volunteering.
What if I want to retire abroad?
If you’re considering leaving the UK and retiring elsewhere, there’s a lot to consider.
For example, you need to take into account any living, moving and housing costs, as well as whether your State Pension will be affected.
To find out more about what is affected when you move abroad, check out the below guide, covering all the essential information.
Fisher Investments UK offers the experienced portfolio management services of its parent company, Fisher Investments, a US-based investment adviser. For over 40 years, Fisher Investments has helped over 68,000 clients down the path of reaching their financial goals.1 We would be honoured to help you as well.
Fisher can manage your hard-earned assets and provide financial planning services so you can spend your time enjoying retirement. Here are just a few ways we stand out from other money managers:
- We will tailor your portfolio to your individual long-term goals and needs.
- We designed our business to put client interests first and minimise conflicts of interest.
- We charge a simple, straightforward fee based on the size of your account.
Finally, with roots as an institutional money manager, we provide the same investment expertise to individuals as our institutional clients. This means you get a more disciplined investment strategy and a higher level of service than you’ll find elsewhere. We welcome you to reach out and discuss your retirement situation and discover if we’re a mutual fit for your retirement needs.
1 As of 31/12/2019. Includes assets under management of Fisher Investments, its subsidiaries and affiliates.
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