Questions to ponder before retiring: Strategies for readying oneself financially for retirement commencement
Retiring in Style: A Guide to Preparing for Your Golden Years
Everyone envisions the perfect retirement, filled with exciting adventures, new hobbies, and treasured moments with loved ones. But, retirement preparation can seem daunting, what with all the decisions to make and questions looming. Here's a lively, actionable guide to ensure you're well-prepared for your golden years:
Can You Afford to Retire?
Affordability is a crucial factor in retiring comfortably. Research from the Pensions and Lifetime Savings Association (PLSA) states that a single person requires £14,400 annually for a basic retirement, while a couple needs £22,400. A lavish retirement with foreign holidays, UK vacations, and streaming service subscriptions would cost £43,100 per year for a single and £59,000 for a couple - a significant increase. Keep in mind that this does not cover the cost of housing, such as renting or paying off a mortgage. if you aspire for a comfier retirement lifestyle, you'll need to supplement your state pension and private pension income to bridge the gap.
Connecting with Your Pension Provider
Navigating the retirement process can feel overwhelming, leaving you wondering if your pension provider will offer support. Guidance from the Pensions Regulator requires pension schemes to send 'wake-up packs' and encourage members to seek guidance from Pension Wise. A spokesperson emphasized that clear, timely, and effective communication at retirement is essential for helping savers understand their options and access more support.
We reached out to several pension providers to learn about this support in practice. Alistair McQueen, head of savings and retirement at insurance company Aviva, indicated that pension providers typically write to members around age 50, and every five years thereafter, until your pension pot is accessed. Approximately six months prior to your retirement age, they send more detailed information about your options, often referred to as a ‘retirement options pack’. Some pension providers may follow different timelines, so if you are unsure, you can proactively contact your pension provider or ask your employer if you are saving in a workplace pension scheme.
Updating Your Expected Retirement Age
Many pension funds have lifestyling arrangements that adjust your portfolio's asset allocation as you near retirement, often by increasing bond allocations and decreasing equity allocations. Typically, your pension provider has a default strategy linked to an 'expected retirement age'. It's essential to update your target retirement age if your plans change, as being in a low-risk strategy too soon may limit growth potential, while being in a high-risk strategy may lead to significant fluctuations just before you retire.
Consolidating Your Pension Pots
Changing jobs several times in a career can result in multiple pension pots, creating an administrative hassle. According to the Pensions Policy Institute (PPI), there is currently £31.1 billion in unclaimed, inactive, or lost pension pots in the UK. In some circumstances, it may make sense to hang onto an old pension, such as being a member of a defined benefit scheme. However, in other cases, it might be beneficial to consolidate your pots, especially if the fees on one pension pot are high or the pot is very small and you want to minimize administrative work.
Consolidating pensions is an irreversible decision, so it's crucial to seek advice if unsure. Before transferring, review exit fees and any benefits like guaranteed annuity rates, and remember that some retirement benefits may diminish if you transfer your benefits out of a defined benefit scheme. Use the government's pension tracing service to find any lost pension savings that might be yours, and make sure to update your personal details, such as home address, whenever they change to minimize the chance of losing your pension.
Managing Your Tax-Free Cash
Upon retirement, you can take 25% of your pension pot tax-free. You have the choice of withdrawing it as one lump sum or taking it in installments. Depending on what you want to use the money for, choosing one method over the other can make a difference. Withdrawing in installments and leaving a portion invested could allow it to continue growing, potentially increasing your tax-free cash over time. Weigh the pros and cons of each approach and decide what works best for your situation in our separate guide, "Should You Take a 25% Tax-Free Pension Lump Sum in Instalments?"
Purchasing an Annuity or Opting for Pension Drawdown
If you decide to use your pension pot to purchase a guaranteed income (known as an annuity), this will pay you a regular amount throughout your retirement. While some opt for pension drawdown which allows you to access your pension savings while leaving the remaining funds invested. Each route comes with unique pros and cons. Annuities can provide a guaranteed income with fixed payment amounts, while pension drawdown offers flexibility and leaves your funds invested, with the potential for growth. A combination of the two options might be suitable for some savers.
Claiming Your State Pension
Recipients of the new state pension will not receive it automatically; you have to claim it. To do this, you will need details like your marriage, civil partnership, or divorce dates, any time spent living or working abroad, bank details, and any social security numbers for foreign state pension schemes. You can apply for the state pension online, by phone, or by post. When applying online, you will need your invitation code, which arrives in the post before your state pension age.
If you're retiring abroad, the process differs slightly, and more information can be found on the government website. There's also the option to defer your state pension if you don't need it immediately, potentially securing a higher amount in the future. Consult "Should You Defer Your State Pension and Stay in Work?" to learn more about deferring your state pension.
Administrative Obligations - How Long Does It Take to Retire?
Planning your retirement date requires knowing the approximate length of time to access your savings once you've requested them from your pension provider. Having your administrative steps lined up correctly ensures you can smoothly plan your retirement without needing to fall back on other savings until your pension money comes through. Consult with your pension provider six months before your intended retirement date to clarify any necessary steps, timeframes, and what information they'll need from you to access your funds.
- To ensure a comfortable retirement with personal-finance luxuries like bonds, streaming services, and traveling, it's necessary to supplement savings and pensions, as they may not cover the entire cost of a desired lifestyle.
- Pension providers should provide guidance and support throughout the retirement process, typically sending 'wake-up packs' and retirement options packs to retirees around age 50 and six months before retirement age.
- In order to fully utilize tax-free savings during retirement, it's important to consider whether one should take the tax-free pension lump sum as a single payment, or in installments to allow it to continue growing.
