Retiring in turbulent times.

30th November 2022

Inflation in the UK was at a 41 year high in October at 11.1% and is expected to remain high for some time, intensifying the existing cost-of-living crisis. It is a difficult time for many people, but what about those planning to retire?

WEALTH at work, a leading financial wellbeing and retirement specialist, helping those in the workplace to improve their financial future, outlines below what to consider if you are planning to retire during these turbulent times.

1. Work out ‘your’ financial plan for retirement

Your expenses are likely to change in retirement, so work out what you think you will need to meet your day-to-day living expenses (such as household bills) and discretionary expenditure (such as holidays and hobbies).  Your current outgoings are a good place to start when working this out, but make sure you take rising prices on food and energy etc. into account.

It’s then a good idea to work out the value of all your savings and investments including pensions. You should bear in mind the impact of inflation on these. For example, those with a defined benefit scheme are likely to have some inflation protection, although often this is limited to between 2.5% and 5%.  Also, as announced in the Autumn Statement, the pensions ‘triple lock’ has been re-instated, meaning that the State Pension will now rise in April 2023 by 10.1%.

2. Can you afford to retire?

Do you have enough put aside to be able to afford to retire or do you need to work a little longer, or perhaps work part-time? Many people may be questioning this right now, especially if their pension has fallen in value due to market volatility. According to the Pensions and Lifetime Savings Association (PLSA), a single person will need about £11,000 a year to achieve the minimum standard of living (this would cover all a retiree’s needs plus enough for some leisure activities such as a week’s holiday in the UK and eating out occasionally); £21,000 a year for a moderate standard of living (a two-week holiday in Europe and more frequent eating out); and £34,000 a year for a comfortable standard of living (this would cover all a retiree’s needs plus two foreign holidays a year and some luxuries such as regular beauty treatments). For couples, it’s £17,000, £31,000 and £50,000, respectively.

When doing your sums, don’t forget to consider how long you think you will live as research has found that most people live longer than they expect. The Office for National Statistics (ONS)[1] estimates that average life expectancy in the UK for people aged 65 will be 85 years for men and 87 years for women.

Also, keep in mind that when you retire, you are likely to be paying less income tax, no National Insurance (NI), mortgages and loans may be paid off, you will have no more pension contributions, and any children are likely to be financially independent.  With these reductions in costs, the income you need in retirement is likely to be significantly less than you require during your working life.

3. Pensions are not the only source of income in retirement

The higher cost of living, as well as stock market volatility, means now may not be the best time to start taking money out of your pension. There are many assets such as cash ISAs and general cash savings, which can be used as sources of income instead of your pension.

4. Consider delaying retirement or working part time

If you are worried about the value of your pension falling due to market volatility, you need to give your pension time to recover, so it may be worth delaying retirement if this is an option for you. You might want to consider making further pension contributions to boost your pot and take advantage of tax relief while you can. In fact, hundreds of thousands of retired people are actually considering returning to work as rising cost of living has derailed their retirement plans. However, if someone has already made withdrawals from their pension other than the tax-free lump sum, something called the ‘Money Purchase Annual Allowance’ kicks in, which limits the amount that can be paid into a pension to £4,000 a year.

5. 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 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! You may be better off taking a smaller amount each year from your pension, keeping within your tax bracket, and then to top it up with withdrawals from your ISA, as this is paid tax free.

6. Shop around

Make sure that you shop around before you purchase any retirement products. Which?[2] found that the difference in growth between the cheapest and most expensive drawdown plans for a £260,000 pot (the average pot value) was nearly £18,000 over a 20-year period. It is important to not only check charging structures, 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.

7. Regulated financial advice can support you through retirement

Increasing numbers are accessing their pension through income drawdown. There are many benefits to this, but it can be a daunting prospect to manage your own finances in retirement, especially during turbulent times. Also the Pensions Policy Institute (PPI) research[3] has found that cognitive decline during 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 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.

8. Protect yourself from scams

The strain on household finances caused by the cost of living crisis could mean that some individuals are more vulnerable than ever this year. In fact, almost a quarter (22%) of UK adults have reported being approached by scammers offering free pension advice or a free pension review, investment opportunities, or a tax refund between March and May this year.

New regulations came into force in November 2021 which means suspicious transfers can be stopped from ending up in the hands of a fraudster, as pension trustees and scheme managers now have new powers to intervene, but you still need to be on your guard. 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.

Jonathan Watts-Lay, Director at WEALTH at work, comments; “If you are due to retire soon, the rising cost of living  is understandably concerning.

When deciding on the right course of action for you, make sure you work out how much you are actually going to need,  how much you have saved for your retirement and if it’s going to be enough. If not, it’s important to have a clear idea of how much more you need to save, and whether delaying retirement is an option.”

He adds; “Some workplaces may provide financial education or guidance through financial coaches to help with this. If you’re over 50, you can also speak to Pension Wise for a free appointment to talk about your pension options.

Also, probably  one of the most important decision you could make is to engage with a regulated financial adviser who can take your personal situation and objectives into account and come up with a sensible plan. You may find that regulated financial advisers can be accessed via your employer or pension scheme so this is a good place to start.”