Jonathan Watts-Lay offers a financial checklist for those in the run-up to retirement this coming year.
The New Year is a great opportunity to take a good look at your finances and make financial plans for the coming year. Individuals who are facing retirement and have a defined contribution (DC) pension will have a number of decisions to make, given the freedom and choice in pensions.
To help with this, we have created a list of top 10 tips for those who are thinking about retiring in 2019.
1) List ALL your assets
Before you make any decisions about your retirement, work out which assets you have and what they are all worth.
In addition to your pensions, which may include defined benefit (final salary), and defined contribution (money purchase) pensions, you may also have other assets such as Isas, shares and general savings. All should be considered as potential sources of retirement income.
2) Work out how much you need in retirement
Think about 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.
You also need to think about how this income requirement may change over time. For example, income needs are widely believed to follow a ‘u shape’ in retirement with the first phase when you are most “active” being the most expensive.
Spending often falls after a while in what is known as the “passive” phase, as people become a little less active and perhaps cut back on areas such as travelling. However costs then may go up later in retirement in the “supported” phase, if extra care and support is required.
3) Think about how to access your pension income
If you have a DC pension, you need to decide how to access your income. You can choose between income drawdown, buying an annuity or taking it as a cash lump sum. It doesn’t have to be just one choice as you could even choose a combination of options.
Don’t worry if it sounds overwhelming. Financial education and/or regulated financial advice can help you understand exactly what each option means and which approach best suits your needs. Speak to your employer about any support that they provide and visit www.pensionwise.gov.uk.
4) Don’t pay unnecessary tax
Don’t forget, typically only the first 25% of a DC pension is tax-free (the calculation for a DB scheme will be different); the remaining 75% is taxed as earned income. You could find yourself paying more tax than you need to if you don’t plan carefully.
For example, some people have taken their pension as a cash lump sum, not realising that it could make them a high-rate taxpayer!
It’s worth looking at your options, for example, 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 topping it up with withdrawals from your Isa, as this is paid tax-free.
5) 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.
For example, the Institute for Fiscal Studies found this year that those in their 50s and 60s underestimate their chances of survival to age 75 by around 20% and to 85 by around 5% to 10%.
6) 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 on to your beneficiaries tax-free, subject to not exceeding the current £1,030,000 lifetime allowance, and providing that the company pays out within two years of the date of death.
7) Shop around
Make sure that you shop around before you make any decisions about purchasing any retirement products. The FCA found this year that those who go into income drawdown could increase their annual income by 13% by switching from a higher-cost provider to a lower-cost provider.
It is crucial that you do as much research as possible to ensure that you select a retirement option that best suits your needs. This means finding a solution that enables you to access the right amount of cash as and when you want it, and for as long as you need it.
8) Consider regulated financial advice as an investment
Many people are concerned about the cost of regulated advice without realising that when you buy retirement products such as annuities, through for example online brokers, there are commissions to be paid which can cost just as much, if not more than getting advice.
In fact, getting regulated advice should be seen as an investment; research from the International Longevity Centre carried out in 2017 suggests that “affluent” individuals who receive advice are on average £30,882 better off when it comes to pension income than those who don’t take advice, and those who are “just getting by” are on average £25,859 better off.
This is because 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. This will also give you the benefit of consumer protection for the advice given, as well as a retirement plan tailored to your individual needs.
9) Protect yourself from scams
Scammers often use highly professional looking websites and marketing literature to lure you in, and they 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. The Pensions Administration Standards Association estimated last year that pension savers have lost more than £1 billion to scams. So, whatever you’re planning to do with your retirement savings, it’s really important to check whether any company that you’re planning to use is registered with the Financial Conduct Authority (FCA).
You can also visit the FCA’s ScamSmart website, which includes a warning list of companies operating without authorisation or running scams.
10) What is right for you?
It’s now easier than ever to access your retirement savings. This is great news, but it’s also a frightening prospect because of the potential risks involved in managing your life’s savings, such as being scammed, paying more tax than necessary or running out of money during retirement.
This is why it’s crucial that you take your time to research and fully understand all your options, so that you’re armed with all the facts to make informed decisions that best suit your lifestyle choices and needs.
Many workplaces now offer support to their employees in terms of financial education, guidance and advice, so individuals should speak to their employer to find out what is available to help them.
Jonathan Watts-Lay is director, WEALTH at work - a specialist provider of financial education and guidance in the workplace supported by regulated advice for individuals.
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