Pension planning is crucial whether your retirement is a long way off or fast approaching. As the culmination of a lifetime’s hard work, it can be a demanding time, both financially and emotionally.
But the hard work doesn’t end once your retirement date arrives. You’ll need to understand your available options and then budget carefully, managing your withdrawals to ensure pension funds last.
Keep reading for three essential tips to help you in the approach to retirement, and once you start to receive your pension.
1. Ask yourself these important questions in the run-up to retirement
When do I want to retire?
The first thing to consider is when you’d like to start receiving your pension. You’ll need to think about when you can retire, as well as what that retirement will look like.
The current minimum retirement age is 55 (rising to 57 from 2028). The State Pension Age is currently set at 66 but is due to rise to 67 by 2028. A further rise, to age 68, is currently subject to government review but is likely to come into force from 2044 or 2037.
What do I plan to do in retirement?
When you can and want to retire will be linked to your plans. If you’re planning large expenses like world travel or house renovations, you’ll need to make sure these are affordable. That might mean working for a bit longer.
Less financially demanding retirement plans might mean you can retire earlier, but be aware that plans can change and factor that into your budgeting.
How much will my planned retirement cost?
Which? confirm that the average retired and semi-retired couple spend £27,000 a year. This figure rises to £42,000, though, for couples planning a more luxurious lifestyle, including long-haul flights and a new car every five years.
You’ll need to factor in additional expenditure like the potential cost of later-life care and any financial help you plan to give to children or grandchildren.
2. Prepare yourself financially
Clear your debts
Having worked hard throughout your career, you won’t want to see your retirement income eaten up by interest on the debt you hold.
Entering retirement with high-interest debt like credit cards or overdrafts could jeopardise your dream retirement.
We can use cashflow modelling to help you calculate your disposable income and identify areas where savings can be made. You can then divert this money to pay off debt.
Remember too, that you can access your pension funds – including an entitlement to 25% tax-free cash – from the age of 55. You might consider using some of this lump sum to pay off debt, significantly decreasing your monthly outgoings.
Review your pension provisions
If you’re overdue for an annual review, be sure to book it now. Checking in with your plan in the run-up to retirement will ensure it’s still on track. That way, if you do have a pension shortfall, there is still time to bridge the gap.
Be sure to maximise your workplace contributions. If you increase your contribution above the auto-enrolment minimum amount, you might find that your employer is willing to increase their contribution too.
Also, be sure to ask about salary sacrifice. Making contributions to your pension straight from your pre-tax salary effectively lowers your pay. This reduces Income Tax and National Insurance payments, for you and your employer.
Go online to check your National Insurance record for gaps. The new State Pension is worth £9,627.80 a year (£185.15 a week) for the 2022/23 tax year. Ensuring you receive your full entitlement is crucial.
3. Manage your pension withdrawals tax-efficiently
Pension Freedoms legislation allows you more flexibility in how you access your pension funds but requires more budgeting responsibility too.
Consider the impact of stock market volatility
You might take regular pension withdrawals for the same amount. Stock market volatility though, such as that caused by Russia’s invasion of Ukraine, can see prices drop.
When this happens, you’ll need to sell more pension units to raise your usual withdrawal amount. This can cause your overall pot to drop quicker than you realise.
Be sure to monitor your pension fund and speak to us if you are worried that the withdrawals you are making aren’t sustainable.
The effect of inflation
A recent announcement from the Bank of England (BoE) confirmed that inflation could rise as high as 10% this year. It won’t return to the BoE’s own 2% target until 2024.
Not only does high inflation reduce the buying power of your money, but it can also influence the pension withdrawals you make.
Be sure you draw down only what you need. This is important because any money you withdraw but don’t spend is likely to sit as cash in your savings account. With interest rates low (despite the BoE’s recent base rate rise) your money won’t be keeping pace with inflation and is effectively losing value in real terms.
Get in touch
If you’re approaching, or in retirement and would like to discuss your options or any other aspect of your long-term plans, we can help. Please get in touch via email at enquiries@hda-ifa.co.uk or call 01242 514563.
Please note
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
Workplace pensions are regulated by The Pension Regulator.
