How can I live comfortably in my retirement?
Most people will face a drop in income when they retire, but the trick is to minimising that impact by planning now and planning well.
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For all but a lucky few, the transition from being part of the working population into retirement invariably means a reduction in income when you start to draw a pension. Of course the reduction in income will vary from one individual to another, depending on the level of private provision made prior to retirement.
But no matter what the reduction in income, the following points may help you to minimise the impact of the reduction in income when you retire.
Don’t wait until the day: plan in advance
Make sure you know what you are entitled to from the state. The basic state pension for those with a full entitlement is currently £477.32 per month in the 2013/2014 tax year, but for those with less than a full National Insurance contribution record, the actual amount you receive could be much less.
You can obtain a pension projection by completing form BR19 which can be downloaded from the internet. However when you receive your projection, be sure to check that you have been credited with the correct number of years.
Check your private pensions to see what benefits you can expect to receive, and think about whether this would be enough.
Make sure you can account for all your pensions; have you moved employers in the past? If so, you may have deferred benefits which you don’t know about. The Pension Tracing Service could help you find any “missing” pension entitlement.
Seek advice on whether you should switch your pensions and investments to safer assets as you approach retirement. This could help avoid heavy losses shortly before retirement, when you don’t have time to wait for your funds to recover.
Try to reduce your debts prior to retirement, to help avoid having unaffordable commitments when your income reduces.
If you are still relying on an endowment, pension, ISA or other investment to repay your mortgage, review the plans regularly and consider whether you need to take steps to cover any likely shortfall in the amount you need to repay the loan.
If you haven’t done so recently, investigate whether you could reduce your household bills by shopping around for a better deal.
Ensure that your pension and investment funds are working as hard as they can be, and that the level of risk you are subject to is in line with the amount of risk you are prepared to take.
When the time comes to retire…
Unless you are lucky enough to be in a final salary pension, don’t accept the pension offer from your current provider before shopping around for for the best annuity. You might be surprised at how much you could increase your pension income just by moving to another provider. An independent financial adviser will be able to assist you in shopping around.
If you are in ill health, suffer from high blood pressure or are a smoker, check whether you are entitled to an impaired life annuity rate.
Even if you don’t qualify for an impaired life annuity, you may be able to apply for an enhanced annuity rate which takes into account your lifestyle and where you live. Discuss with an independent financial adviser whether buying a conventional annuity is the best route for you; there are other options which may suit you better, such as drawdown, short-term annuities and investment annuities.
Consider whether it would be worthwhile building in a spouse’s benefit to your pension if your spouse has insufficient pension provision, to ensure your spouse would be catered for in the event of your earlier death. Likewise, a guarantee period or value protection could be considered if you want to ensure you or your estate receive at least a certain level of benefits in the event of your death soon after retirement.
Beware of relying heavily on bank interest to supplement your income. Over time, inflation can erode the spending power of both your income and capital, and periods of falling interest rates can devastate this additional income stream.
It is important to have a clear understanding of your overall financial situation, and review your circumstances regularly to ensure you are on track to meet your goals. An independent financial adviser will be able to assist you with your financial planning.
About the author
Michael Roberts is a Chartered Financial Planner and Director at Invest and Protect. He has worked in financial services since the very start of his working life. With humble beginnings as a trainee in a call centre with Prudential, he progressed through a number of roles before leaving to begin advising clients in 2002.
Please note: The opinions, beliefs and viewpoints expressed by our contributing authors do not necessarily reflect the opinions, beliefs and viewpoints of unbiased.co.uk.