Retirement plans
for 2021 have changed for many due to the pandemic. Whilst some have decided to
put their retirement on hold due to their savings taking a hit because of
Covid-19, others are deciding to retire early after being discouraged about
finding employment again when faced with redundancy.
But before making
any decisions about your retirement plans, there are a lot of options to
consider.
To help, WEALTH at
work, a specialist provider of financial education and guidance in the
workplace supported by regulated financial advice for individuals, has created
a list of top 10 tips for those who are thinking about retiring in 2021.
Estimate how much you may need in
retirement – Work out
how much income you are going to need in retirement including essential income
to meet your day-to-day living expenses (household bills etc.) and
discretionary income for holidays, hobbies etc.
Don’t presume it is the same as your salary. It may be possible to have the
same disposable income in retirement as when you were working, even if your
pension income is less than half your salary. This is because when you retire,
you may be paying less income tax, no National Insurance (NI), mortgages and
loans may be paid off, no pension contributions and children are likely to be
financially independent.
Carefully consider whether you can
really afford toretire – Do you have enough put aside
to be able to afford to retire, or do you need to work a little longer, or
perhaps part-time? Research has found that most people live longer than they
expect they will, so keep this in mind when doing your sums. The Government estimates that life expectancy
in the UK for people aged 65 will be 85 years for men and 87 years for women.
Pensions are not the only source of
income in retirement –
When it comes to retirement, there are many assets such as ISAs, shares and
general savings, which can be used as potential sources of income in addition
to your pensions. It is a good idea to work out which assets you have, what
they are all worth, and the best way to use them to make sure you are not
paying unnecessary tax.
Don’t pay unnecessary tax – Usually only the first 25% of a defined
contribution (DC) pension is tax free (the calculation for a defined benefit
(DB) scheme will be different); the remaining 75% is taxed as earned income.
Unfortunately, in recent years many people have found themselves paying more
tax than they need to. For example, some people have taken their pension as a
cash lump sum, not realising that it made them a higher rate tax payer! It may
be more tax advantageous to take income from your non-pension savings first.
Also, you may be better off taking a smaller amount each year from your
pension, and then to top it up with withdrawals from your ISA, as this is paid
tax free.
Think about how to access your pension income – If you have a DC pension, you can
access your savings from age 55 and will need to decide whether you want to do
this through income drawdown, buying an annuity, taking it as a cash lump sum,
or a combination of these options. Help and support is available to help you
understand what each of these options are, and which might be best for you. Speak
to your employer about any support that they provide, such as financial
education and/or access to regulated financial advice. You can also visit www.pensionwise.gov.uk.
If you have
a defined benefit (DB) pension, your pension income is usually based on a rate
set by the scheme (the accrual rate) and typically is a percentage of your
salary for the number of years you have been a member of the scheme. A DB
pension usually has a set retirement age of between 60 and 65 but you may be
able to draw benefits earlier or later than this. Some people may want to
transfer their DB pensions into a DC pension fund so that they can have greater
flexibility over their savings. However, it is important to understand the
advantages and disadvantages of this first, as well as the associated risks
such as falling for a scam, buying inappropriate retirement products, paying
more tax than necessary and ultimately running out of money.
Shop around – Make sure that you shop around before
you purchase any retirement products. Which? found that the difference between
the cheapest and most expensive income drawdown plan for a £250,000 pot was
£12,300 lost in charges over a 20 year period. It is important to not only check
fees, but make sure it suits your needs, and that you can withdraw cash as and
when you want it, and for as long as you need it.
Make sure your pension beneficiary
details are up-to-date
– In 2015, the Chancellor abolished tax on death on DC pensions for anyone who
dies before the age of 75. This means that any remaining pension can pass onto
your beneficiaries tax free; subject to not exceeding the current £1,073,100 lifetime
allowance, and providing that the company pays out within two years of the date
of death, so make sure your beneficiary details are up to date.
Regulated financial advice can be an
investment – The FCA
found that only 6% of pensions were accessed to purchase an annuity in 2019/20.
Increasing numbers are accessing their pension through income drawdown. However,
PPI research has found that cognitive decline over retirement may make it more
difficult for some people to make appropriate decisions about how to access
their savings in their older years.
Regulated
financial advice can be a solution to this and may actually cost the same, if
not less than buying retirement products, such as annuities, through some
online brokers. It can also be seen as an investment as an adviser will look at
all of your assets, work out the most tax efficient way for you to fund your
retirement and then put a bespoke plan in place for you, which will support you
throughout retirement.
Protect yourself from scams – Scammers often use highly
professional looking websites and marketing literature to lure you in, and tend
to sound completely legitimate when they contact you. It’s easy to see why so
many people are fooled, and it isn’t small amounts of money which are being
taken. Action
Fraud have found that more
than £30m has been lost to fraudsters since 2017. So, whatever you’re planning
to do with your retirement savings, it’s vital to check whether the company
that you’re planning to use is registered with the Financial Conduct Authority
(FCA) https://register.fca.org.uk/. You can also visit the FCA’s ScamSmart
website which includes a warning list of companies operating without
authorisation or running scams www.fca.org.uk/scamsmart.
Choose
what is right for YOU – The
ability to access your pension income in a way which works for you is a great
option to have, but it is also a frightening prospect for many. Losing your
life savings to scams, paying more tax than necessary or running out of money during
retirement are real concerns, so it is vital that you make sure that you fully understand
all of your options, to be able to make informed decisions that best suit your
lifestyle choices and needs.
Jonathan Watts-Lay, Director at WEALTH at work, comments;
Whilst the
retirement plans of many have been disrupted because of the pandemic, hopefully
our top tips will help people to understand the important things they need to
consider before they retire, and help them feel more confident about what they
need to need to know, where to go for help and what to look out for.
Watts-Lay concludes;
“Many employers now offer access to financial education, guidance and even regulated
financial advice, to their retiring employees, so it is worth speaking to them
to find out what help is available.”
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