Many over-55s do not want to pay for financial advice or cannot justify the expense. Here, Moneywise talks to financial experts to share their ideas for a successful DIY retirement income plan
Tom McPhail, head of policy, Hargreaves Lansdown
“The transition period between work and retirement is now so much more personal”
“The key advice I would start with is to plan carefully how and when you will access your pension. To some degree, retirement decisions can be out of our control (such as job loss or illness), but it is still a good idea to have a decent understanding of how much you have and what kind of an income you can expect.
You should also think about what you want that period of your life, between perhaps 55 and 75, to look like; the transition process now from work to retirement is much more personal than it used to be.”
Steve Webb, director of policy at Royal London and ex-pensions minister
“Annuity income lasts as long as you do”
“If you turn your pension pot into an income for life by buying an annuity, the big advantage is that it lasts as long as you do. If you manage your own investments in retirement instead of buying an annuity, remember that your retirement could last for decades and you don’t want your pot to run out. Search for ‘How long will my pension need to last?’ tool on the Office for National Statistics website (Ons.gov.uk). This gives you an average figure, but is also a reminder that quite a lot of people live a lot longer or shorter than the average so you can plan accordingly.”
“It’s good to know how much you have and what kind of an income you can expect”
Martin Bamford, chartered financial planner and managing director, IFA Informed Choice
“Have a plan for what you’ll do when you retire”
“Have a decent plan for retirement. Too often, we meet clients on the verge of retirement who have only a vague idea about how they will fill their time in the future.
“Moving from employment to the extreme flexibility of retirement can be a jarring experience. In some cases, new retirees end up going back to work on a full- or part-time basis, because they miss the social interaction and purpose that comes with working.
“There are so many opportunities for retirees to find purpose and form new friendships. We encourage clients to explore options for volunteering, especially in their local communities where they can make friends and give something back.”
Kay Ingram, director of public policy at IFA LEBC
“Make sure family is protected when you die”
“It’s important your dependants are looked after after you die. This may include understanding what your pensions and life cover will or will not pay out, filling any gaps… and making sure you have a valid will. An adviser will help to ensure all the paperwork is in place and that your future will not be thwarted by lack of money. Knowing that your loved ones will have no financial worries when the worst happens can give peace of mind and that’s hard to put a price on.”
“Many people get less than the full state pension, which is £164.35 a week”
Patrick Connolly, chartered financial planner at IFA Chase De Vere
“Don’t just assume you’ll get the full state pension when you retire”
“For many people the state pension will play an important role in meeting their income needs in retirement. However, lots of people don’t check how much state pension they’ll receive and assume they’ll get the full state pension of £164.35 each week (or £8,546.20 a year). However, the actual amount you’ll receive depends on your national insurance record and many people will get less.
“There have also been changes that affect when people get their pension – it could be later than you think. You can request a state pension statement from Gov.uk/check-state-pension or by calling the Future Pension Centre on 0800 731 0175. This will tell you how much you might get, when you could get it and if there is any way that you can increase it.”
Ed Monk, associate director for personal investing at Fidelity International
“Don’t be afraid to take a risk with your investments”
“Don’t be afraid to take a risk with your pension savings. Many of those entering retirement will be making their own investment decisions for the first time and may be daunted by the options facing them, and scared of losing money.
“If you don’t take sufficient risk with your invested pension, choosing only cash savings or government bonds, you lock yourself into a substandard investment return that lowers the income you’ll generate.
“Those at the start of retirement hopefully have decades for their pension to benefit from compounded investment returns.
“Assets such as equities and, within that, smaller company or emerging markets shares, are likely to be more volatile but could generate a better return overall. As long as these are balanced with steadier, income-producing assets, with withdrawals set at sustainable levels, riskier investments have the time to recover short-term losses and greatly benefit your pension fund in the long term.”
“Retirees can be scared of losing money and then don’t take risks”
Jon Greer, head of retirement policy, Quilter
“Track down all of your pensions”
“A job for life is becoming a thing of the past as the average person will hold about 11 jobs in their lifetime. The Department for Work and Pensions has found that there are hundreds of millions of pounds sitting in unclaimed pensions. Many of these funds are lying dormant because people forget to update their addresses with old providers and subsequently forget they ever existed.
“One of your first steps as you approach retirement should be to track down all your pensions. The government has a free online service to search for lost workplace pensions (Gov.uk/find-pension-contact-details).”
Fiona Tait, technical director, Intelligent Pensions
“Sometimes the most obvious course of action is the wrong one”
“Try to leave your pension invested as long as possible. Yes, I know you’ve spent a long time building it up with the expected purpose of providing an income when you retire and it’s great that you have, but sometimes the most obvious course of action is not the best one. Money held within a pension fund receives very favourable tax treatment so long as it remains invested, but it will be taxed as income when it is taken out of the pension.
“Many people like to keep aside some savings in case of emergencies and want the comfort of knowing they can access it when and if it’s needed. This is understandable, however, since the introduction of the changes popularly known as ‘pension freedoms’ it has been possible under many plans to withdraw a lump sum from your pension once you reach the age of 55.
“It may seem counter-intuitive but this means you have the option of using your pension to provide any emergency funds and your other personal savings to provide retirement income, as well as keeping your income tax bill to a minimum.”
Jonathan Watts-Lay, director at Wealth at Work
“Remember pension withdrawals are taxable”
“Don’t forget only 25% of a defined contribution pension can be taken tax free; the remaining 75% is taxed as earned income. So careful tax planning is a must.
“This new pension world is all about looking at all your savings and investments to provide retirement income in the most tax-efficient way. It is important to utilise your available tax allowances and reliefs in a structured manner to maximise returns and reduce, or even eliminate, a potential tax charge.”
Jamie Smith-Thompson, managing director of Portafina
“Stress-test your finances”
“There are many important questions to ask someone who is on the brink of retirement, but there is one that springs to mind: Do you know if you could stay on top of your money if things become expensive?
“If you find yourself in this scenario, the best thing to do would be to have a plan and stress-test it. Stress-testing your finances and checking if you would have enough money in case things did get pricier is the best way of knowing what you can and can’t afford.
“Reviewing your budget plan, looking at what you are spending your money on each month and where you could save more is a great start.”
“Get a handle on your own spending and how much prices have gone up”
Michael Martin, Private client manager, Seven Investment management (7IM)
“Keep a spreadsheet of your spending”
“I ask clients to keep a spreadsheet of their spending patterns at least four years ahead of retirement, so they can get a handle of their own spending habits and how much prices have gone up.
“Bear in mind when planning for retirement that how much you’re spending might change. The world of work can put a natural break on your spending habits. But once you’re retired, unless you want to be stuck at home for five days a week, you might find that your spending goes up. I won’t pretend that keeping a spending spreadsheet is fun – but it’s worth it.”
Alistair McQueen, head of savings and retirement at Aviva
“Free help is available if you want it”
Don’t forget there is lots of free help if you need it. The Money Advice Service (Moneyadviceservice.org.uk) offers guidance about all things financial; the Pensions Advisory Service (Pensionsadvisoryservice.org.uk) is great at translating the complex into the simple; and PensionWise (Pensionwise.gov.uk) helps you understand your options at retirement. Go ask!
What would be your top tip for planning retirement? Let us know: email@example.com