Retirement planning is a complex process. As your retirement date draws nearer, it’s sensible to think about some key issues that will help get you off to the best possible start for the next stage in your life. Follow our simple tips below to give yourself peace of mind and, the best possible opportunity to make your pension plan work for you.
1.) Clear your debts
In nearly all cases, it makes sense to reach your retirement date debt-free. This is important as your income will potentially go down after retirement. Remember, interest rates for borrowing tend to be higher than any interest rates for savings, so being debt-free as soon as possible should be your priority – this includes mortgages, loans, credit cards and so on. Interest rates are also subject to change, so you do not want to be paying high interest on borrowing.
2.) How much will you spend?
As part of your retirement planning, you need to consider how much retirement income you need every year. There are several tools online that can help you calculate a figure, such as the Money Advice Service’s Budget Planner. As a rule, you should aim for two-thirds of your annual salary as your retirement income, according to Which (1). If you plan on using the flexibility of the income drawdown option of your private pension you should also think about how your spending might change throughout retirement. Your spending might rise, for example, later in retirement due to increased health and care costs – and you need to bear in mind if you have any financial dependents who will rely on your money.
3.) How much income?
Now is the time to work out exactly how much you are going to be receiving. This is especially the case if you have more than one pension plan or have retirement savings in other sources such as bank accounts or investments. Don’t forget the State Pension too. You might also have other financial income – for example, if you rent out a property or downsizing your home. Finally, you might also be planning a phased retirement, or to draw your private pension early whilst continuing to work. A pension assessment by an independent financial adviser like Pension Works is often helpful in putting all these figures together.
4.) Consider your options
Pension freedoms mean that there is now a range of options available to you when it comes to drawing your pension. It’s worth considering this as part of retirement planning. Remember, you can potentially draw your private pension from age 55, and so working part-time might be an option. If your pension plan allows the option for income drawdown, you can withdraw money as and when you need it – whilst the rest stays invested. Pension drawdown needs careful planning to make sure your pension savings last throughout your retirement.
5.) Update your will
Updating your will should also be a key part of your retirement planning. However, this does not only apply to assets such as your savings, investments, and property. You also need to consider what will happen to your pension savings, and this may not be covered in your will. You need to fill in the right form – called an ‘expression of wish’ or a ‘nomination of beneficiaries’ form – for each pension provider. This is especially important if you have financial dependents, or your spouse is also relying on your private pension. Providers often have different rules, and so you need to check with them or your independent financial adviser.