6th January 2021
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 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 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 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 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.”