Just as planning a wedding or for your first home, being prepared for when you retire involves important life decisions. It’s a good idea to start thinking about which retirement option you want to take up to ten years before you are planning to stop work. Whichever pension option you choose will affect the income you receive for the rest of your life. It would therefore be prudent to involve a financial adviser to help you decide which is the most appropriate option for you.
There are certain factors that you need to take into consideration before deciding on how you want to use your pension pot.
Work out your retirement income
Your retirement income will be made up from your state pension, plus any pensions you’ve accrued during your working life. You can obtain a state pension statement from the GOV.UK website, and if you’ve lost track of pensions from previous jobs, the Government’s Pension Tracing service can help you locate them. Add in any other savings you have earmarked for your retirement, too.
Consider what your post retirement budget will look like
Your income may be less, but your outgoings will change. For example, work-related expenses will disappear, but there might be activities you plan to take up in your retirement. You may need to spend more on gas and electricity. Plan your budget and think about what last minute tweaks you might need to make to your pension payments now, so that the income you receive later on will allow you to live comfortably in retirement.
Move into lower risk investments
The last thing you want is for the value of your pension fund to suddenly drop just before you want to draw it. Moving your savings into lower risk investments helps reduce the chances of that happening. In fact, some pension funds will automatically do this as you approach retirement age. However, not all of them do, and it would be wise to speak to a financial adviser who will be able to help determine which, if any, changes need to be made. Again, this is something that you should be thinking about during the years running up to your retirement.
Boost your pension if you can
While moving your pension pot into lower risk investments might reduce the overall rate of return, there are other ways in which you can increase it. The two most effective ways would be to make larger payments into your pension pot if possible, meaning more can be invested. Delaying the date when you start to draw your pension means that the income will be higher, as you would be drawing your pension over a shorter period of time.
Clear your debts as much as possible
Entering retirement with a clean slate is the ideal scenario. With no debts, you can enjoy your retirement income to the full. Since your pension will represent less income than you were receiving when you were working, you won’t want to be using it all on repaying debts. Instead, look for ways in which to pay them off as quickly as possible before you start drawing your pension. Some retirees choose to use their tax-free lump sum to pay off their debts, but depending on the type of pension you have, this may not necessarily be the best option. If you’re not sure, it’s best to seek professional advice – a retirement planning specialist will look at all your pensions and finances and advise the best way in which to reduce your debts, as well as help you settle on the best retirement option for you.
Set a date for your retirement
You don’t actually have to stop working when you start drawing your pension, although you do need to be at least 55 years of age. However, the date you want your pension income to begin may be dictated by some of the factors above. If you’re planning to vary the date on which you wish to start drawing your pension, you’ll need to check with your personal or workplace pension provider to ensure this is possible, and that there are no hidden charges in doing so.
Whatever decision you take, make sure you take advice beforehand. The Government offers free pensions guidance under a scheme called Pension Wise, which will help you understand your options. Private financial advisers will give more personalised advice, although they will charge a fee. Make sure you choose one that is FCA registered.