Can you afford to retire?
We all dream of that day when we can pack away our desks, say goodbye to our colleagues and leave the workplace for good in order to pursue our passions, whether this is playing golf, gardening, going travelling or even studying.
However, while most people would like to retire between the ages of 60 and 65, the sad reality is that many of them may simply not be able to afford to.
According to research from LV=, around 64% of people aged 45-54 are concerned about their income during retirement.
The credit crunch and its impact on people’s savings and pensions pots, and house prices, is probably one of the main reasons people are considering putting off retirement. LV= reports the number of over-50s planning to work past state retirement age is up 43% since 2010 so that 6.4 million of them now expect to work longer.
So how do you work out when you can afford to retire?
The first thing you should do when deciding whether you can afford to retire or not is to get your state pension forecast. You can do this by calling The Pension Service (0845 300 0168) or online.
According to Matt Pitcher, a wealth adviser at Towry Law, people who don't get their state pension forecast are missing a trick. “This forecast can help put the amount of money you’ll have in retirement into perspective, as it also works out your likely expenditure in the future,” he explains. “This is a wake-up call to help you realise the true cost of retirement and whether you can afford to do it.”
The state pension age is currently 65 for men and 60 for women and in order to qualify for a state pension you must have built up enough qualifying years – these are defined as a tax year when you have earned enough income to pay national insurance.
Currently, you need to make 30 years of qualifying years of paying national insurance to be eligible for the full state pension, but this will rise to 35 years for both men and women from 2017.
Many women (and men) who took time out of their careers to raise a family or care for older relatives may find they have not built up enough qualifying years to be entitled to the state pension – which is why getting a forecast is so important.
If you don’t qualify for a state pension, then there is an option to buy missing qualifying years – an amendment made in October 2008 to the Pensions Bill means people can buy up to an additional six years' worth of contributions on top of their current allowance. However, there are several factors to take into account before you do, so seeking professional advice is recommended.
If you do decide to stay working beyond the age of 60 or 65, then you have the option to defer your state pension. This allows you to build up extra income or a taxable lump-sum payment.
Once you’ve got your state pension forecast, the next step is to track down any other pension pots you may have. Tom McPhail, head of pension research at Hargreaves Lansdown, warns that this can take time.
“Go to the administrators of your previous employers’ pension schemes and make it your business to find out how much these are worth,” he adds. “People in their 50s need to start thinking about doing this, as it’s important to get in control and get a good picture of where you will be, financially, come retirement.”
He also suggests that people with various pension pots consider consolidating these to make them easier to manage. However, there are several factors to take into account.
First of all, take into consideration any restrictions or penalties. For example, many older personal pensions levy a charge if you wish to transfer it – Pitcher warns that this can be as high as 30% of the pension’s value but reduces to 0% if you leave it where it is until you retire.
“A good way to judge whether it’s worth paying this charge or not is to divide the penalty amount by the number of years you have left until you retire,” Pitcher explains. “So, if the penalty is 10% and you have five years until you want to claim it, then you will be losing 2% of the value for every year you leave early. In order to offset this, you’ll need to ensure your pension will earn an annual return of at least 2% in its new home.”
Another important trap to watch out for if you are considering consolidating your pension are guarantees. These might relate to an annuity product (the part of your pension that pays you an income after you retire); many older pensions have guaranteed annuities paying 10% income, a rate you may find hard to come by now.
Others offer a guaranteed minimum pension amount. If transferring would mean the loss of such guarantees, then Pitcher says it's worth leaving your pension where it is. Final salary schemes should also be held onto, he adds, as the government guarantees the security of these.
If you do want to consolidate your pensions, then consult an independent financial adviser to help find you a new home for your retirement pots that won’t charge you for transferring.
As you approach retirement you’ll also need to start thinking about where your pension is invested and whether you need to reduce your exposure to risk. This is known as lifestyling, and while some pensions do this automatically as you get older, others may require you to make decisions about the right time to move away from equities and into bonds or other fixed-interest assets.
“The right time to ‘de-risk’ your pension is impossible to call,” says McPhail. “Seek advice if necessary, and think about what your retirement aspirations are – for example, if you are happy to work beyond state retirement age then you could leave your pension in riskier assets for longer.”
Generally speaking, it’s worth starting to think about your options 10 years before retirement, and taking action when you have about five years to go.
Making up any shortfalls
So, what if your pension isn’t going to be big enough to fund the retirement you’ve always dreamt about?
You have several main options. Firstly, Pitcher suggests people look at increasing their contributions while they are still working. If you’ve paid off your mortgage and the kids have moved out, then review your finances using a budget and see if you can afford to pay more into your pension.
Another option is to take on riskier funds and hope this boosts your pension before you retire. Of course, this is a risky approach, but Pitcher says: “The reality is, the more risk you have, the higher your return is likely to be.”
However, speak to a financial adviser before you go down this path, as it may be that your circumstances mean you simply cannot afford to take on any additional risk.
Equity release is also a possible solution. Mark Gettinby, director of financial services at Intune, part of Help the Aged, says: “Some people see their property as part of their pension provision – you can either downsize and use the profit to fund retirement, or look at taking out an equity release mortgage to either provide an income or a lump sum amount.”
However, equity release is a complicated product that shouldn’t be taken out lightly. You can read more about your options here, but you must also seek specialist advice.
Finally, if these options aren’t suitable or sufficient to make up any shortfall, you may find you have to grit your teeth and carry on working.
Staying in work
According to government figures, the majority of people retire before the age of 65. If you do decide to defer retirement and stay working, then you may need to consider the possibility that you won’t be able to continue in your current job.
While you have the right to request to continue working after the state default age (currently 65) your employer does not have any obligation to grant this request.
If you do want to stay in your job then you must make your request in writing at least six months in advance of turning 65. Your employer has a duty to seriously consider this request.
Employers may also set an age requirement for a job, if this could prevent you from doing your job properly – this is known as a ‘normal retirement age’. If this is younger than 65, then your employer must be able to provide justification for this.
If you are unable to stay in your current job, or simply want a change, then you may want to consider moving to another role.
Remember, employers can refuse to hire you if you're over 65 or their normal retirement age (whichever is the higher) without having to justify this. If you apply for a job within six months of your 65th birthday, then an employer can also refuse to consider this.
McPhail suggests people start thinking about what they might want to do once they hit their 60s as early as possible: “Whether you can’t afford to retire or simply want to stay working, then think about the type of work you would want – and be able – to do when you are in your mid-60s. You may want to reduce your hours, or take a less stressful or active job.”
Learning a new skill could be an option. Kirstie Donnelly, director of products and marketing at Learndirect, says: "Reaching a certain age can be the perfect opportunity to retrain, with many people finding themselves with more time and less commitments. For those looking for employment, training obviously offers benefits. With employers increasingly recognising the significance of broader, more fundamental skills - those that underpin our ability to do any job - over 50s already have the advantage with greater life experience, which can also be used to mentor younger employees."
Your everyday finances
"Ideally, you should aim to enter retirement debt-free," says Pitcher.
Gettinby suggests people consider using any lump sum they take from their pension upon retirement to pay off outstanding mortgage debt, credit cards or loans. This is because the interest on such debt is likely to be higher than you could earn in a savings account.
“Paying off debt means you can free up the income from your pension annuity to fund your retirement,” Gettinby adds.
As well as your pension, you may also have money in savings accounts or ISAs.
However, if your money has been sitting in the same account for a while, it’s probably worth reviewing the interest you are earning and using Moneywise's comparison service and other websites to see if you could improve your return.
There are certain points in everyone’s life when it pays to review your insurance and protection needs – retirement is one of these. As well as looking into reducing your premiums by moving your home and contents, car and travel insurance to a new provider, you should also consider if there are any policies you can ditch.
“Most people will no longer need income protection or payment protection insurance once they have retired,” says Gettinby. “And if your kids are financially independent, you might also want to review your life insurance.”
However, don’t be tempted to downgrade insurance policies without first considering the consequences. “For example, think about whether you could afford to replace your possessions if you ditch your contents insurance,” says Gettinby.
When you enter retirement you may find the government will provide benefits that can help you financially. You can find out if you are entitled to benefits at entitledto.co.uk or at turn2us.org.uk.
Alison Taylor, a director at turn2us, says: “To make an informed choice about what age to retire, individuals need to be fully aware of all the financial support that could be available to them. This could be in the form of pension credits, council tax benefits or other allowances. If an individual chooses to keep working or cannot afford to retire at their set retirement age they should also look into working tax credits to supplement their income.”
A feature of defined contribution pension funds. As people move closer to retirement, their tolerance to risk reduces. “Lifestyling” recognises this and provides an automatic switching facility from funds with higher volatility to ones with less volatility as retirement approaches. Generally this means the pension fund manager gradually moving a client from riskier assets such as shares into corporate bonds, gilts and cash as they near retirement.
A scheme originally established in 1944 to provide protection against sickness and unemployment as well as helping fund the National Health Service (NHS) and state benefits. NI contributions are compulsory and based on a person’s earnings above a certain threshold. There are several classes of NI, but which one an individual pays depends on whether they are employed, self-employed, unemployed or an employer. Payment of Class 1 contributions by employees gives them entitlement to the basic state pension, the additional state pension, jobseeker’s allowance, employment and support allowance, maternity allowance and bereavement benefits. From April 2016, to qualify for the full state pension, individuals will need 35 years’ of NI contributions.
Generally thought of as being interchangeable with life assurance, but isn’t. Life insurance insures you for a specific period of time, at a premium fixed by your age, health and the amount the life is insured for. If you die while the policy is in force, the insurance company pays the claim. However, if you survive to the end of the term or cease paying the premiums, the policy is finished and has no remaining value whatsoever as it only has any value if you have a claim. For this reason, life insurance is much cheaper than life assurance (also called whole of life).
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
Does exactly what it says on the tin: covers the contents of your home for theft and damage and also may insure certain possessions (jewellery, cycles) outside of the home. Things to watch for include the excess and also the maximum payout on individual items. Another grey area is kitchen fittings, as some contents policies say these are not contents but part of the fabric of the property and covered by buildings insurance and some buildings policies don’t cover them because they regard them as contents.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.
A term to describe financial products or ‘plans’ that help older homeowners turn some of the value (equity) of their homes into cash – a lump sum, regular extra income, or sometimes both – and still live in the home. There are two main types of equity release: lifetime mortgages and home reversion plans (see separate entries for both). Whichever type you choose, you borrow money against the value of your property, on which interest is charged, and the loan is repaid when the house is sold after your death.