The transition from work to retirement is a big step for most people and takes careful planning to make sure your finances are in good shape to give you what will hopefully be a comfortable retirement.
But as you approach retirement what are the things you should be considering? What can you do to ensure you get that comfortable retirement? How should you arrange your finances?
Our team of advisers are highly experienced in providing retirement advice we therefore thought we’d put together a list of things you should consider in the year before you retire.
1. Start looking at your retirement options
There are dozen or so ways of taking an income from your pension. An Annuity is still the most popular choice, but other options including Income Drawdown, Fixed Term Annuities and Investment Linked Annuities are also available and should be considered.
Spend some time reading up on the main options, our free Retirement Guide will be help you better understand the advantages and disadvantages of each of the options available to you.
2. Plan your budget
This is a crucial part of getting retirement planning right and can be more important than when you are working because it is harder to influence your income.
We would recommend carefully working out how much income you need to pay the bills plus an amount to cover discretionary spending such as holidays and leisure activities. Think about how your lifestyle might change in retirement, for example, you will be at home more, this could push up heating bills and you will probably have more leisure time too.
Think also too about any significant items you need or want to purchase, for example a new car, home improvements, that holiday of a lifetime you have always promised yourself. All these things need to be factored in.
Then take a look at how much income you will have and remember to factor in any tax you will pay, particularly after the announcement in the budget last week that the age related allowance will be frozen and indeed withdrawn for retirees from April 2013.
Start with State Pension plus any other benefits you may be entitled to. Then look at your pensions, use an online pension Annuity calculator to give you an estimate of the income you may get in retirement. Remember that this is only a guide, the pension Annuity calculator won’t take into account any health issues you have which might mean you qualify for an Enhanced Annuity, and of course it will only look at Annuities, however it’s a start.
You will now have an idea whether you have surplus income in retirement or a shortfall.
If the latter is the case you need to think about whether you can trim your expenditure or squeeze more income from your pension, it might also be worth looking at whether you can take an income from any savings or investments you might have (see point six).
3. Think about making extra pension contributions
You might like to think about paying extra into your pension in the year or so leading up to retirement.
Making a lump sum pension contribution can be an effective way of bridging a shortfall in retirement, and of course you will benefit from tax relief.
There are of course downsides to pension contributions, for example you can’t have access to all the capital as you can with say an ISA, but if you have a shortfall it’s certainly worth considering
4. Reduce risk
If you are planning on buying an Annuity then think about reducing the level of risk you are taking in the months, and possibly years, leading up to retirement.
We are constantly amazed by the number of people still fully invested in the stock market just days before they buy an Annuity.
We know that when the stock market is rising it’s hard to bring yourself to move to safer Cash or Deposit based funds, but just think of the effects on the world’s stock markets of a major sovereign default or a natural disaster such as the Japanese tsunami. Such events could see the value of your pension fall significantly, exactly at the wrong time, leaving you with a lower income for the rest of your life or even having to delay your retirement until the fund recovers.
Think of the “what if” and consider moving to Cash or Deposit funds to protect your pension from sharp falls in value which could have a major impact on the income you receive for the rest of your life.
5. Think about repaying debt
For most people taking a mortgage, loan, credit card or overdraft, into retirement is not ideal.
Think about whether repaying debt, perhaps from your tax free lump sum, or indeed other savings or investments, would help to reduce your outgoings and make your financial situation more comfortable in retirement.
Clearly everyone’s situation is different and it might not make financial sense to pay off a mortgage which costs relatively little each month because of current low interest rates. But if you have debt, consider whether it should be repaid and the consequences of not doing so.
6. Review savings & investments
Deciding how you are going to convert your pension pot to an income can be a time consuming task.
It makes sense to review your other savings and investments at the same time as you look into your retirement options. But we understand that looking at all areas at the same time can be daunting, and that concentrating on just one area at a time is preferable for many.
Therefore, why not review your savings and investments in the year before you retire? Get the job out of the way, leaving you to concentrate on your pensions when the time comes to do something with them.
Reviewing your savings, ISAs and other investments at around the time you plan to retire is important as you probably won’t be adding much to them from now on, indeed you may want to take an income. Would this need a change of investment strategy? Are there other options you should be considering? Are you taking too much risk? How are the returns you are getting? All these questions and more should be looked at.
7 . Find an Independent Financial Adviser
You would expect us to say that, wouldn’t you?
On online pension Annuity calculator can only get you so far. We believe though that high quality, independent financial advice, from a suitability experienced and qualified adviser can be invaluable at this stage of your life.
Not only will you be able to learn from the adviser’s experience, after all this is the first time you have retired and they have seen many people go through the same journey, they will be able to advise you on which of the dozen or so options is most suitable for you when it comes to converting your pension into an income.
If you are looking for an IFA to help you arrange an Annuity then read our blog, “9 questions to ask your Annuity adviser” to make sure you ask all the relevant questions.
Planning your retirement is much more than deciding on which Annuity to buy, a successful transition from work to retirement requires careful planning to make sure that everything is done to give you the lifestyle in retirement that you would like.
Our team of Independent Financial Advisers in Nottingham are experienced in developing retirement income strategies for clients the length and breadth of the UK. If you are approaching retirement and would like advice on our options call one of our IFAs today on 0115 933 8433, alternatively enquire online or email firstname.lastname@example.org