Knowing when you can afford to retire if often the question people put off asking. But the earlier you can get to grips with your current financial position and identifying any gaps in your pension funding that need to be made up, the better opportunity you have of having the retirement you want.
Knowing if and when you can afford to retire will normally involve talking to a financial adviser about:
- Your current pension funds
- How much you pay in, and any employer contributions you also receive
- How far you are away from your desired retirement age
- The kind of lifestyle you envisage in retirement
- Where your contributions are invested and how they are performing
Your financial adviser can build a clear picture based on these factors and will work with you to draw up a realistic plan. For example, if you want a comfortable retirement but your pension savings are unlikely to support the lifestyle you want, you may need to retire later or pay in more.
Projecting when you can afford to retire with any degree of accuracy can be tricky, especially if you have more than one pension. However, your financial adviser should have access to financial modelling tools to give you a clear picture.
All pension schemes will have a range of charges used to pay for the costs of running the scheme. Although there may be a range of different charges, one of the main ones that can impact on the growth of your pension pot is the Annual Management Charge (often abbreviated to ‘AMC’). In recent years, competition amongst pension providers has increased significantly and regulation has driven down the average charge you can expect to pay on modern pension plans. It can be worth shopping around as you may find a better pension scheme than your existing one for a much lower overall cost.
Just like your bank account, pensions are now far more accessible than they used to be. Getting access to information about your pension pot used to be limited to receiving an annual pension statement – no wonder people found it easy to forget about their pension savings. Today, providers offer online access to your pension pot, smartphone apps, and the ability to administer your scheme and investments using technology.
Features and benefits have also expanded dramatically too, with many modern pension plans offering far greater flexibility over how you can access and draw your pension in retirement that older schemes do not provide.
Pensions are the most tax effective means to save for the long-term and the cumulative effects of tax relief can help many people grow a nest egg that will help them live a more comfortable life in their years after work. However, the tax regulations that apply to pensions can be complex. Without the right pension advice, you may lose out. The key issues here are to ensure you are claiming your full tax relief if you are a higher rate tax payer and, if you are a very high earner with large pension savings, ensuring you do not exceed the maximum allowances available, which can result in a hefty tax charge.
Depending on the terms of your existing pension arrangements, the value they provide, the features and benefits, investment options and your future requirements, it may be worth changing providers. This may mean moving one or combining multiple pensions. Because pension rules and regulations have changed so much over the years, it’s important you take the advice of a financial adviser. Older schemes sometimes offer guaranteed benefits and other specifics that are not available elsewhere. You can read more about Pension Transfer Advice here or, if you are considering a Defined Benefits Final Salary Pension transfer, you can read more here.
Depending on the kind of pension you have, you may have access to a range of different investment funds to choose from. These are often designed to offer choice to people who have different appetites for investment risk, from cautious to adventurous, or they may offer different choices of assets. If you have a Workplace Pension and you were auto enrolled into it, it may be that you have never selected an investment and you were invested into the scheme’s default investment.
Choosing the right investment funds ensures your money is invested according to your wishes, your attitude to risk, and with consideration of your likely retirement age and retirement plans. As your pension pot grows bigger, ensuring your investment strategy is appropriate and performing well becomes more and more important. Speaking to a financial adviser who can assess investment performance and help you quantify your attitude to risk can ensure your pension is best placed to perform well.
What are the key Retirement Planning considerations?
Even when you reach your pension scheme’s ‘Default Retirement Age’, you don’t have to draw your pension if you don’t want to. It may be a good time to review it and make sure it is invested appropriately, but you can continue to pay in and leave your nest egg to grow.
If you have other income that you can rely on in retirement, you may consider cashing in smaller pension pots. Normally, the first 25% is paid to you free of tax and the remaining amount will be taxable.
You can use some or all of your pension funds to buy an annuity, which is designed to provide you with a regular guaranteed income. A financial adviser can help you shop around for the best deal and talk you through the various options.
If you want to reduce your working hours without retiring completely, or you have other incomes that you only need to top up from time to time, modern pension plans and retirement accounts allows various ways to access your pension pot flexibly when you need to. These offer the greatest flexibility but will need to be managed carefully. A financial adviser can ensure your pension is well managed so your investments are appropriate and you don’t end up paying more tax than you need to when you choose to draw from your pension.
A Warning: Be ScamSmart – don’t fall victim to scams!
- Reject unexpected offers: Be wary of cold calls – they are completely illegal
- Know who you are dealing with: When it comes to transferring large sums of money from your pension, always deal with a registered, professional financial adviser
- Check any contact details you are given: Some scammers ‘clone’ legitimate financial advisers’ websites to pass themselves off as the real thing
- Don’t be rushed or pressured: When something sounds too good to be true, it probably is. There should never be a need to rush – financial advisers are paid to get things right for you and ensure you feel comfortable and in control
- Get impartial information: Don’t let someone tell you what to do and take time to understand your options