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, outlines below what employees will need to consider if they are planning to retire during these turbulent times.
1. Work out a financial plan for retirement
Expenses are likely to change in retirement, so employees should work out what they think they will need to meet 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, employees should make sure they take rising prices on food and energy etc. into account.
It’s then a good idea for employees to work out the value of all of their savings and investments including pensions. They 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 they afford to retire?
Do employees have enough put aside to be able to afford to retire or do they 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 their sums, employees should consider how long they think they will live as research has found that most people live longer than they expect. The Office for National Statistics (ONS)[1] estimates that the average life expectancy in the UK for people aged 65 will be 85 years for men and 87 years for women.
Also, they will need to keep in mind that when someone retires, they are likely to be paying less income tax, no National Insurance (NI), mortgages and loans may be paid off, they will have no more pension contributions, and any children are likely to be financially independent. With these reductions in costs, the income needed in retirement is likely to be significantly less than what is required 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 a pension. There are many assets such as cash ISAs and general cash savings, which can be used as sources of income instead of a pension.
4. Do they need to consider delaying retirement or working part-time?
If employees are worried about the value of their pension falling due to market volatility, they may want to delay retirement to give their pension time to recover. They could also consider making further pension contributions to boost their pot and take advantage of the tax relief. 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. Tax considerations
Unfortunately, in recent years many people have found themselves paying more tax on their pensions 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! Employees may not realise that they could be better off taking a smaller amount each year from their pension, keeping within their tax bracket, and then to top it up with withdrawals from their ISA, as this is paid tax free.
