Financial Considerations for Your Retirement
Tips for getting the most out of retirement, part two of our series
Retirement is one of those major life events that people look to with equal amounts of relief and trepidation, often due to the financial considerations associated with retirement and your associated pension. How do you know you will have enough saved? Will your state pension and private pension pots be enough? How much will your new lifestyle cost? What special circumstances should you consider? Should you continue to work in some capacity? As a business owner, what part will you continue to play in the finances or running of your business?
A financial advisor should be able to help sort out those questions with you and smooth your path to retirement as much as possible.
When should I start thinking about retirement?
Often your scheme administrator will start sending you wake up packs at 55, if not earlier. The state pension age is under review, proposed to rise to 68 by 2044 and 2046 and there is no longer a default retirement age (which was 65) - so if you want to work longer than your state pension age you’re able to. You’re also able to retire before the state pension age as well; it’s all a matter of things like:
your current and planned lifestyle
your living expenses
your risk appetite
your personal pension pots, investments and savings
your personal circumstances (health, etc)
About 2-5 years before a person plans on retiring is often when financial advisors recommend reviewing your risk profile, but you may not be the “average” person. Your life and your needs are unique, and the most common path may not be the right path for you. Maybe you want to sell your family home and travel the world, or maybe you plan on becoming the carer for your partner, or maybe you’d like to give your loved ones an early inheritance.
Every person has a different idea of what their retirement will look like, and those personal circumstances can make all the difference to how a financial advisor recommends managing your money in that retirement.
What are the options with pension?
With the Pension Freedom Act of 2015, after the age of 55 you’re able to have a bit more flexibility about how to access your defined contribution savings. Before this, most had to buy an annuity with their pension savings, which had the upside of a guaranteed income throughout retirement; but became less popular as annuity rates fell.
Presently, as an individual, you have a number of options to access your pension, all with both benefits and drawbacks and all with considerations dependent upon your current situation and desires for your retirement. Options include:
Annuities: the traditional method of accessing pension where you buy an annuity at the beginning of your retirement and it pays out a guaranteed amount over either a set period of time or your lifetime.
Drawdown: only taking “what you need” for a set period of time while leaving the rest invested (can be either “capped” or flexi depending on when the plan was set up).
Take your pensions as a number of lump sums: similarly to a drawdown, you take what you need in lump sums from your pension.
Take your whole pension in one go.
With all options, not all pension plans offer all payout options. You’ll also want to consider for all options the tax-free threshold of the payout is usually 25%; the rest of the income you’ll need to pay tax on. And because of the risk involved, you are required to speak to a financial advisor by law if you want to take your entire defined benefit pension in a lump sum.
And if you’d like to retire later or build up and increase your pension pot more, you can continue to get tax relief on:
pension savings of up to £40,000 a year, or
100% of your earnings if you earn less than £40,000, until age 75.
With continuing to save, though, there are laws around what’s called “pension recycling” and if you’re seen to break those laws, you could be in some rather serious trouble.
How can a financial advisor help?
As we can tell from what we’ve illustrated above, there are a number of different scenarios and pieces of information to take into account when planning retirement and making the right steps to secure your financial future and well being into your older years.
Whether that’s how to manage investments and risk when choosing drawdown, or even understanding what the best choices are for your circumstances - medical, lifestyle or otherwise, a financial advisor can help you plan that out clearly. According to the late 2021 Saltus Wealth Index, even high net worth individuals have a gap in understanding how much they would need to have in their pension pots to retire at their desired comfort level - and misjudged by about half. A sanity check by a well-trained professional is in everyone’s best interest, then.
How should I choose a financial advisor?
Financial advisors should all be registered with the FCA, which is publicly accessible.
Working with a firm or financial advisor that understands the area you live in can be helpful as that way the advisors have an implicit understanding of at least part of the lifestyle you’re currently living. Reading reviews online and speaking to friends and family is also an important step in finding the right financial advisor for you.
You can get free guidance on your pension and retirement options from:
Pension Wise for “defined contribution” pensions
Speaking to a financial advisor about your options in retirement will help you plan in a way that fits what you want from your future and rest assured your retirement and pension is well looked after.