Guide: 12 steps to a worry-free retirement

It’s never too early to put your retirement plan in place, nor too late to revisit it. You’ll want to ask yourself some key questions as you approach retirement:

When do I want to retire?

You’ll have a retirement date in mind, based on when you want to retire or when you’ve calculated that you can afford it. As you approach this date, you should consider whether it’s still viable.

Have your circumstances changed since
you last checked-in with your plan? Maybe you’ve had an unexpected inheritance or now have to cover the cost of a divorce? Can the date be brought forward, or does it need pushing back?

What do I plan to do in retirement?

Having an idea of what you plan to do in retirement will inform how much you’ll need to save now. Plans for extensive overseas travel will require a larger pension fund than spending more time with your grandchildren or on your allotment.

If your plans have changed, how does this impact the amount of money you might need?

If you need a larger fund, will you have to push your retirement date back?

How long will my money need to last?

Life expectancies are increasing. Current Office for National Statistics (ONS) stats show the average male lives to age 84 and the average female to age 86. So, if you’re looking to retire at 65, bear in mind that your pension fund could need to last for at least 20 years.

You should take time to set out your current cashflow, considering all outgoings. Then do the same exercise based on what you want to do in retirement. Depending on your lifestyle, it’s likely you’ll spend less in retirement than you do now, but how much less? Is your current pension provision sufficient to cover your desired lifestyle for 25 years?

Next steps – Draft an outline plan including when you’re hoping to retire and what you’d like to do during your retirement. Review this with a financial adviser if you have one.

No matter how you intend to fund your retirement, a key proportion of your income will likely come from the pensions you have contributed to. The days of one job for life – stopping work on the Friday to start your retirement on the Monday
– are long gone, as people often have several different jobs during their working life.

So, it’s likely you could have several different work-based pensions as well as any personal pensions you may have started yourself. It’s worth spending time making sure you have details of all your existing pensions and get up to date values for each.

There is a pension tracing service to help you find any pension details you may have lost track of.

As well as values and projections for your planned retirement date, you should also check the full details of the type of arrangements you have. Do they offer flexible access? What funds are available? What charges are you currently incurring? Are there any potential safeguarded benefits?

Next steps – Put together a schedule of all your pension arrangements. If you’re not sure of some of the details, you can use the government Pension Tracing Service to help you track down old plans.

Once you have a clear idea of all your pension arrangements, you might want to consider consolidating them into a single arrangement.

Rolling all your small pension pots into one means you don’t have a whole series of statements to keep an eye on – you’ll just have one plan with a single view. This will make it much easier to review and manage.

Consolidating your pensions also means you can potentially reduce the charges you’re currently paying and could also give you access to a wider choice of investment funds.

However, financial advice is important if you’re thinking of consolidating as you need to ensure you don’t give up any valuable benefits, such as guaranteed income, available through current plans by transferring out.

In particular, financial advice is compulsory if you’re considering transferring out of a Defined Benefit scheme (sometimes known as a Final Salary scheme). You may also incur fees for consolidating various pensions into one.

Next steps – You should really seek advice before transferring your pensions into a single plan, so speak to a financial adviser.

It’s never too soon to start saving for your retirement.

If you haven’t started putting money into a pension already make it a priority, regardless of your age. Even starting with a low monthly amount will get you into the habit, and the longer the money is invested, the more chance it has to grow in value and the greater the chance of better investment growth.

Value of a £100 per month investment over different terms to age 65 – assuming 5% investment growth each year.

As you can see from the table, a delay of just five years in starting contributions can have a massive impact on the final fund. In this example, five years’ worth of contributions is just £6,000, yet the impact of that money not being invested means a drop of £24,000 in fund value at age 65.

If you’re already contributing to a pension, consider increasing your contributions, and review the amount you put in each year as your salary goes up. Think about using pay rises as an opportunity to increase your regular payments by redirecting some or all of the extra amount into your pension. Likewise, with any lump sums you receive.

The table below shows the value of increasing regular contributions by just 3% each year. It clearly shows that even just a small increase each year can make a substantial difference to the final value of your pension fund.

If you currently have other fixed term financial outgoings such as a car loan, consider diverting that money into your pension when the you’ve paid the loan off.

Next steps – Review your finances and see how much you could realistically con- tribute to your pension. If you are already paying into a pension, consider increasing your contributions.

Remember there are tax advantages in contributing to a pension, so it’s worth trying to maximise the amount you pay into your arrangement.

If you’re a basic rate taxpayer, the government will top up any contributions you make by 20%. So, if you pay in £100 they will pay a further £20 – that’s an immediate 20% growth on your pension investments.

If you’re a higher rate taxpayer you’ll get basic rate relief at source when you make any contributions, but you can also claim additional relief through your tax return each year.

Remember that someone not earning is still entitled to get basic rate tax relief on contributions. You can contribute up to £2,880 for someone not earning, and the government tax relief top up will take this up to £3,600.

Additionally, if you have a limited company, pension contributions can be used to reduce the amount of Corporation Tax you pay, although note that this is not the case for sole traders.

Next steps – Tax relief on pension contributions is a valuable benefit. You should take this into account when working out how much you can afford to contribute.

If you’ve been a member of a Defined Benefit scheme (sometimes referred to as a Final Salary scheme) you might want to consider transferring the benefits into a personal pension.

The first thing you’ll need to do is to find out what the transfer value is. The trustees who run the scheme will provide this for you.

You should be aware, however, that the FCA state that it is rarely in your interest to transfer out of a Defined Benefit scheme. You will be giving up a guaranteed pension for life, with an automatic increase each year usually in line with inflation, as well as a tax-free lump sum.

Before taking any steps to transfer in this way, you should speak to a financial adviser. If your transfer value is over £30,000, advice is compulsory and this has to be given by a financial adviser with specific qualifications, insurance and permissions from the regulator.

Next steps – Obtain transfer values and full details of the benefits available, from the trustees of your Defined Benefit scheme. Transferring from a Defined Benefit Scheme is a complex issue and you should always speak to a financial adviser who will review your circumstances and only recommend a transfer if it is in your best interests.

The amount of State Pension you receive will depend on the number of qualifying years you have, and any gaps in your National Insurance contributions (NICs).

The full State Pension is £175.20 per week in 2020/21. To get the full amount you’ll need 35 qualifying years of National Insurance Contributions (NICs).

You should be aware that if you have gaps in your NICs, you may not receive the full amount. You can request a forecast to find out exactly how much your State Pension will be when you retire. Ask your financial adviser if you’re unsure. 

Next steps – Request a State Pension forecast to establish what you’ll be entitled to and at what age.

How you invest your pension fund can be crucial to the success of the fund.

Different investments carry different levels of risk. Higher risk investments have the potential for higher investment returns, but equally have a higher chance of sudden short-term losses.

Generally, if you’re still some time away from retirement, you can look to invest for more growth potential, knowing over the longer-term higher risk investments should deliver higher returns.

As you get closer to retirement, a sudden drop in value could impact on your plans to retire, as it may take time for your fund value to recover to where it was.

Investing can be complicated, so if you aren’t sure about different investment strategies, we’d strongly recommend you get Independent financial advice.

Next steps – Review your current pensions to see where they are invested. Speak to an Independent financial adviser regarding your investment strategy.

As well as looking at your own pension arrangements, you should also consider the arrangements held by your spouse or partner and incorporate them into your planning considerations.

Remember you can contribute £2,880 a year into a pension for someone even if they aren’t earning. Contributions on their behalf also get tax relief at 20%, which makes them an ideal savings vehicle.

If your spouse or partner does have their own pension arrangements, consider them alongside your own arrangements when looking at retirement income planning.

Next steps – Check the pension arrangements held by your spouse or partner. You can use the Pension Tracing Service to find any pensions they might have.

Be sure to make full use of the ISA allowance if you can afford to. The individual ISA allowance is £20,000 in the 2020/21 tax year. Note that this cannot be carried over into the following tax year, so if you don’t use your allowance, you’ll lose it.

ISAs are free from both Income and Capital Gains Tax, so if you have ISA holdings, be sure to maximise your tax-efficient savings by using up your full allowance each year in the run-up to retirement, if you can.

Next steps – The tax advantages of ISA investment mean they should form a key part of any financial planning process. You should look to maximise your ISA contributions for both yourself and your partner or spouse.

If you’ve still got high-interest unsecured debt like credit cards or overdrafts, now’s the time to put a serious debt repayment plan in place, and to stick to it.

The interest you’ll be paying on credit cards is likely to be in excess of the average growth you can expect on any pension or ISA investment, so your first priority before concentrating on saving for retirement should be to clear any outstanding debts.

Focus on paying off the highest interest cards first. Once you have paid them off, consider diverting the money you were paying on debt into pension contributions or other savings.

Next steps – Talk to a financial adviser to see how they help you manage your debt in the run-up to retirement. The less debt you have, the more stress-free retirement will be, and the more money you’ll have to spend on achieving your desired lifestyle.

Retirement planning can be a complicated process and financial advice can be crucial to ensuring you’re getting the best value out of your pension arrangements.

Getting advice can also be beneficial and add actual value to your fund. Research from the Institute of Longevity has suggested that the value of financial advice could equate to £47,000 over the course of a decade.

An adviser will also be able to help you with all the aspects of investing we’ve covered in this guide, from how much to invest, working out your attitude to risk, and the best ways of helping you achieve your financial aims.

They will also be able to help you with the various taxation implications associated with pensions, so you benefit from the tax advantages and avoid any unnecessary tax charges.

Northfield Wealth are an expert Independent financial advice firm, and can advise on all types of pensions including final salary schemes. They are award winning advisers with an excellent reputation and a passion for helping people achieve their financial goals. If you feel you would benefit from professional, expert, Independent financial advice, please get in touch.

Next steps – Northfield Wealth can help you with all aspects of your retirement planning. Email admin@northfieldwealth.co.uk or call us on 01445 886325.