Make your savings last for longest holiday of your life...
RETIREMENT is often sold as life’s golden chapter but it is not uncommon for those hurtling headlong towards it to be gripped with FORO – a fear of running out, not just of time, but of money.
Worrying about finances can cloud a saver’s confidence about how to eke out their pension pot, even if someone has saved diligently for this longest holiday of their life.
Nearly half of those nearing retirement are anxious they cannot afford to retire while 62 per cent believe they will struggle to make ends meet.
Financial anxiety has been heightened by the arrival of new pension freedom rules, giving individuals more control over what to do with the money they have salted away in their pension.
These freedoms allow savers to access their pension funds from age 55 and mean they are no longer forced to buy an annuity – a guaranteed income for life.
Annuities have declined in popularity due to their poor value. Importantly, once an annuity i s set up, i t cannot be unwound.
Opting not to buy an annuity means taking direct control of your money – withdrawing slices of your pension as and when you need it.
Patrick Connolly, chartered financial planner at adviser Chase de Vere, says: ‘ Pension freedom provides fabulous opportunities, but we have concerns. Some withdraw too much, others too little. So they either run out of money or live an unnecessarily frugal lifestyle.’
Ray Black, managing director of financial advice firm Money Minder, says: ‘Being able to take control of your pension at retirement is great news, but it does require discipline to make it work effectively.’
Follow our essential guide to helping your savings last a lifetime.
PLAN TO LIVE THAT MUCH LONGER
DATA suggests a healthy person reaching the age of 60 over the next few years will go on to live on average an extra three decades.
Despite this, many people underestimate their longevity by several years, according to Money Minder. Its latest survey suggests that four out of 10 people approaching retirement do not believe they will live beyond 80 – ‘a massive underestimate’, according to Black.
WORK OUT COSTS OF SURVIVAL...AND FUN
ALLOCATE a note book or a computer spreadsheet for jotting down the costs of necessities from food, energy bills, council tax, phones and broadband – and the mortgage, if you still have one.
If you want more than a baked beans and daytime television retirement then do a tally of costs for the things that make life worth living.
Research by the Joseph Rowntree Foundation suggests the minimum acceptable standard of living for a single person in retirement requires £10,000 of income a year. This assumes there is no mortgage to pay and excludes spending that many people consider a necessity rather than a luxury – for example running a car, having a dishwasher and a TV subscription.
So when totting up, include eating out, takeaways, cinema and theatre trips, television subscriptions such as Netflix, membership of sport clubs and other hobbies. There are also birthday gifts and holidays to budget for.
Insurer Standard Life calculates that for an ( almost) no expense spared lifestyle – with six weeks of holidays a year – annual bills could top £35,000 for a singleton.
ADD UP COST OF HELPING THE NEXT GENERATION
MANY people want to help children or grandchildren, perhaps by contributing to school and university bills or providing money towards a deposit on a first home.
A survey by Saga found the average total contribution made by grandparents to grandchildren is £9,300.
BUDGET FOR BIG PURCHASES
HOME improvements are a popular pursuit in retirement. So, if you think you might want to refurbish the kitchen or need to replace the car, add these into the sums.
TAKE THE OPPORTUNITY TO PAY OFF DEBTS
MOST people take advantage of the right to take 25 per cent of a pension pot as a tax-free lump sum. Consider putting this to good use by paying off outstanding debts such as any remaining mortgage.
TOT UP ALL PENSION SOURCES
CHECK the value of all retirement savings, including pensions, investments, National Savings and deposits.
Make an allowance for the State pension that kicks in between ages 67 and 68, depending on when you were born.
It is currently worth £164.35 a week – £8,546 year – for those who have made the full national insurance contributions.
To discover your entitlement go to the link gov.uk/check-state-pension.
Track down all workplace and private pensions. Millions of pounds sit in unclaimed pensions, often because savers have not given forwarding addresses.
For forgotten workplace pension schemes, visit gov.uk/find-pensioncontact-details.
ADD IN ALL YOUR SAVINGS PLANS
MONEY held in a pension receives favourable tax treatment so long as it remains invested but will be taxed as income when taken out.
It may be worth drawing on other assets first.
Ian Browne, pensions expert at wealth manager Quilter, says: ‘Consider tapping into Individual Savings Accounts and housing wealth where income tax is not a factor.’
HOW TO MAKE THE POT LAST
PENSION annuities still have advantages.
Browne says: ‘They are simple and reliable. Rates on annuities also change over time and so may offer better value in the future for those looking to secure a guaranteed income.
‘Your health may also deteriorate which means you could obtain a higher rate from a so-called enhanced annuity.’
Patrick Connolly, chartered financial planner at adviser Chase de Vere, says: ‘An annuity allows people to have a secure income for life. People shouldn’t be gambling with income they need to pay day-to-day bills.’
Building a retirement pot usually means investing in riskier assets that can provide strong long-term capital growth.
But once retirement starts and if a pension pot remains invested it needs to be managed more conservatively.
Anthony Gillham, head of investments at Quilter Investors, says: ‘If you stick on the same investment path as when accumulating wealth, and the pension fund suffers a fall in value, then those losses are effectively locked in if you sell assets to take an income.’
Connolly adds: ‘By keeping the pension fund invested, it remains in a tax efficient wrapper and benefits from investment growth.’
DON’T GET STUNG INTO PAYING TOO MUCH TAX
THERE are tax implications to consider when accessing a pension. Connolly says: ‘The first 25 per cent of a fund can be withdrawn tax-free but the rest incurs income tax at your marginal rate.
‘Withdrawals above the tax-free element will be added to your income and there is a risk of a large withdrawal pushing people into a higher rate of income tax.’ Since the pension could remain invested for two or three decades, some of it should be invested in equities and the rest in safer assets such as fixed interest to offer a degree of protection.
Connolly s a ys: ‘ We’ve been reminded in recent months how stock markets can fall quickly.’
Sophie Kilvert, private client manager at wealth manager Seven Investment Management, says: ‘I find it useful to split a pension fund into buckets, comprising cash, bonds and equities.’
Those who draw an income from their pension fund will need to review it regularly to ensure their pot will survive as long as they do. Connolly says: ‘Too many people are withdrawing pension income without fully understanding the risks.
‘If we see a sustained period of poor investment returns we could witness people run out of pension money.’
Keith Richards, chief executive of the Personal Finance Society, adds another word of warning for those who raid their pots too quickly. He says: ‘State benefits could be disallowed if someone was thought to have exhausted their savings irresponsibly.’
WHERE TO GO FOR HELP IN MANAGING A PENSION
TO help avoid rash financial decisions at retirement, it is vital to seek guidance or financial advice.
Free help is available from the Money Advice Service at moneyadviceservice.org.uk, the Pensions Advisory Service at pensionsadvisoryservice. org. uk and Pension-Wise at pensionwise.gov.uk.
Money Minder provides a personalised retirement options report – normally £9.99 but free this month. Details at: money-minder.com.
To find a chartered financial planner to do all the sums and devise a tailor-made retirement strategy, visit the Personal Finance Society website at thepfs.org/yourmoney/find-an-adviser.