Retirement is one of the most significant life stages from a financial and personal standpoint.
Financially, you’re at a stage where you can use what you’ve accumulated during your working life.
Personally, you’re about to have the most free time you’ve ever had to spend however you want to..
Because of this, it’s important to get your ‘ducks in a row’ before retirement and consider the key points in the below checklist.
Know You Have Enough Before You Commit
Imagine thinking you have enough to retire and then a few years in realising that you weren’t actually able to live the retirement you expected or wanted.
I’ve seen it many times where prospective clients have come to me post-retirement to check they’re actually on track and can sustain the retirement lifestyle they’ve wanted and expected.
Cashflow planning can be a useful tool when planning for retirement and could give you the confidence to take the step into retirement.
Cashflow planning involves building a comprehensive timeline, factoring in key life events (such as major holidays and anniversary spends, downsizing your home, repaying your mortgage etc.) to understand the affordability of certain scenarios, such as retirement. It can give you confidence in your plan to retire at a certain point of your choosing.
It’s also helpful to be able to stress test the effects of different market events or life events on your retirement to reassure you that it’s the right time to retire and that it is affordable. After all, who wants to go back to work after retiring?
Of course, cashflow modelling is merely a model towards the future so is never going to be absolutely accurate, but it allows us to consider the overarching plan and ensure that this is feasible.
Think About What You Really Want From Retirement
Imagine tomorrow you wake up and you’re retired. How much would you need to live on each month? How much would you spend on holidays? Remember, you might be more agile and adventurous in the earlier years of retirement, so this should be accounted for in your expenditure.
Using the early years of retirement, or even time before retiring, to really think about what you want from it can lead to more fulfilment during retirement.
By thinking about this early on (ideally before you retire) and with as much detail as you can, the cashflow planning exercise above can be as accurate as possible and ensure you have enough when assessing the sustainability of your retirement goals.
Consider Consolidating Pensions
It’s unlikely that during your career you’ve remained in the same role and same pension fund throughout so you’re likely to have multiple pension funds with different providers and with different investment objectives.
Provided there are no additional benefits attached, consolidating these can make things easier to manage and more in line with your circumstances and needs, as well as reducing the administration of multiple pensions with multiple providers.
Evaluate How Your Funds Are Invested
Major life events such as retirement are an opportune time to rethink how your funds are invested and what you’re comfortable with from a risk standpoint.
During your working life, it’s common for funds to be invested in what’s known as a default fund which tries to appeal to the masses but is, therefore, not appropriate for everyone because it’s not specific to you!
Everyone has a different feeling towards risk and everyone is in a different situation with differing wants and needs, so your pensions and investments need to be specific to you.
Factoring in what’s important to you in retirement can help shape the way you think and invest your funds and may mean you don’t have to take as much risk as you thought or may mean you need to increase risk to achieve your goals.
Mortgage Repayment
A common concern people have when they retire (if it’s still a factor) is how to repay their mortgage. Many may take the mindset that they’ll use their pension tax-free cash for repaying their mortgage, however, this may not be the best option.
Tax-free cash in your pension is an extremely valuable and flexible tool that can play a key role in your retirement planning. Using your tax-free cash as an income source in retirement can help to improve longevity of your funds, may be more tax efficient and potentially increase income levels.
There are a few points that should be considered before using tax-free cash to repay an outstanding mortgage:
How will this affect your future retirement income?
What is your current interest rate on your mortgage?
How much tax-free cash do you have available?
Would you be better off using your tax-free cash for an income rather than repaying debt.
Annuity Vs Drawdown
A huge concern for retirees is how to take their pension funds in retirement.
Since 2015, the Pensions Freedom Act has allowed retirees to take their pension via flexible drawdown meaning they can take as much or as little as they want to fund their retirement on an ongoing basis.
It gives people the flexibility to vary their income depending on their circumstances and other income sources. For example, using their personal pensions as a bridge to state pension age, then reducing or stopping this income once in receipt of their state pension.
Given these benefits since 2015, along with low interest rates for most of that time, annuities have become far less popular although we’re in a period where they’re a bit more sought after due to current interest rates.
UK annuity rates have risen over recent years because they’re closely linked to interest rates. Annuity providers usually buy government bonds to create reliable returns for their customers.
When interest rates go up, bond returns rise with them. That boosts annuity rates too, which means that annuities now are a more popular retirement choice than just a few years ago.
For many, the benefit of taking funds flexibly and being able to pass on funds to loved ones through drawdown outweighs the guarantee of income throughout retirement. For others, taking an annuity removes worry and uncertainty into retirement.
It may be suitable to even do a ‘mix and match’ approach by partially annuitizing to cover a certain level of expenditure and retaining the rest in a drawdown fund. The truth is, there is no blanket correct answer, it’s all circumstantial.
Check Your State Pension Entitlement
State pension entitlement is built from National Insurance contributions during your working life. To qualify for a full state pension currently, you need 35 full years of National Insurance contributions.
But what happens if you’ve taken a career break? Had children and not claimed NI credits? Moved abroad? Or not had a 35-year career?
It’s sometimes possible to top up National Insurance contributions from years where you haven’t fully contributed by making voluntary class 3 contributions at a current cost of £17.45 per week or £907.40 per year.
You can check what you are currently entitled to by completing a state pension forecast here.
Ensure Your Estate is Set Up Correctly
Not necessarily one of the areas that will help to grow your funds or ensure longevity throughout your own retirement but a significant planning area for people is ensuring your funds are passed to who you wish if anything were to happen to you.
An up-to-date will can be one of the most overlooked areas of financial planning but arguably one of the most important. If you were to die without a will, your estate is distributed according to the laws of intestacy which state that funds are passed to specific people depending on your family setup, even passing to the state under certain conditions.
Similar to your will is an expression of wishes which states who you want your pension funds to be passed to on death. Because your pension funds sit outside your estate they’re not considered in probate valuations and wills.
The health and welfare Lifetime Power of Attorney enables your attorney to make decisions on your behalf if you’re unable to in relation to your choices in areas such as life-sustaining medical treatment and general medical care. It only comes into effect once you’ve lost mental capacity.
Final Thoughts
Retirement looks so different to everyone, there’s no ‘one size fits all’ or ‘cookie cutter’ solution that meets every individual’s circumstances but many face the same concerns and decisions at a similar time in their life.
The earlier you can think about what you want from retirement, the more likely you are to put a plan together to achieve the retirement of your dreams!
As ever, if this is something you’d like to have a chat about or if you have any general questions, look me up.
Until next time…