Over the last few decades, you have probably been saving into your pension, almost unthinkingly, ready for a retirement that seemed a long way off.
That life milestone may now be fast approaching. And, after all those years of hard work, it’s important not to let your foot off the gas too early.
You might have a large pension fund, but do you have a plan? Thinking about when you want to retire, how much money you have and what your retirement will look like, is essential if you’re to ensure you make the most of your hard-earned gains.
Here are three reasons you need a financial plan if you’re intending to retire in the next few years.
1. You need to know what you intend to do in retirement (and how much it will cost)
When considering your retirement, you need to think about what you intend to do when you stop working. This will clearly play a large part in dictating the amount of money you need.
With a few years to go until your retirement, now is a good time to reflect on what really matters. Whether it’s travelling, hobbies, or more time with the grandkids, there are no wrong answers when it comes to planning your retirement.
Nor is a plan you make now set in stone. But your retirement plan does represent the culmination of decades of hard work and it’s important to give it the time it needs.
Thinking about the sort of retirement you want will also give you an idea of how much money you’ll need to fund your lifestyle.
Research by Which? in 2019, found that the average retired household spent around £27,000 a year, including all the basic areas of expenditure and some luxuries, such as European holidays, hobbies and eating out.
The study also found that you’d need £42,000 a year if you include luxuries such as long-haul trips and a new car every five years.
Now’s the time to start thinking about your plans, and how much you’ll need to find your desired standard of living.
2. You need to know what provision you have already made
Now you know how much money you need to fund your retirement, it’s time to establish what provision you have already made.
Remember that your retirement income won’t just comprise the pension plans you hold; it will come from other areas too. This study by the Department for Work and Pensions found that only around 70% of the income of pensioner couples came from benefits (including the State Pension) and pension income, with the rest from other sources.
Source: Department of Work and Pensions
Firstly, you should establish your State Pension entitlement. The amount you get will depend on the number of qualifying years you have, and whether there are any gaps in your National Insurance contributions (NICs).
To get the full State Pension of £9,110 per year (in 2020/21) you’ll need 35 qualifying years of NICs. Request a forecast to find out the amount of State Pension you will get when you retire.
You should then request a pension forecast for any other pensions that you have paid into. These might be through company pensions you have previously been a member of, or personal pensions. Request a forecast from the administrator or provider to get an idea of what you can expect to receive.
Use the government’s Pension Tracing Service to track down the contact details for any lost pensions.
In addition to your pension benefits, your retirement income may also come from:
Earnings – Phased retirement is becoming increasingly popular. According to People Management, 52% of adults will continue to work in some capacity after they retire, abandoning the traditional cliff-edge retirement. You may generate some of your retirement income by remaining in work, perhaps part-time
Other investments – you may have other sources of income too, such as a Buy to Let property or an investment portfolio that aims to deliver a reliable income.
Establishing a financial plan will take all these factors into account. Cash flow planning can also benefit you, as your forecasted retirement income can be modelled against your lifestyle to ensure you can meet your financial goals.
3. You can make up any shortfall
It is only by having a financial plan in place that you can focus on your long-term goals and set about achieving them.
If you’re looking to bring your retirement date forward, you need to know that your retirement pot will allow you to maintain your desired lifestyle for the rest of your life. If you add big-ticket retirement plans like world travel, provisions for the cost of your later-life care, and possible inheritance planning, you might find you have a shortfall.
Creating a financial plan will help you tackle any shortfall. You have time and a firm plan to top up your pensions and making the most of allowances and tax efficiencies in the run-up to retirement.
Top up your pension
Pensions are tax-efficient, so if you are looking to retire early, or find yourself with insufficient funds to maintain your desired lifestyle in retirement, topping up your pensions is a great place to start.
You’ll need to be aware of several allowances, such as the Lifetime and Annual Allowance, so if you’re not sure which allowances applies to you, we can help.
Top up your ISA
The current ISA allowance is £20,000 but it can’t be carried over into the next tax year. If you haven’t invested your full amount for the tax year, consider doing so each year in the run-up to your retirement.
Interest earned from a Cash ISA is tax-free and gains made in a Stocks and Shares ISA are free of both Income Tax and Capital Gains Tax (CGT).
The value of advice when creating a financial plan
Pension Freedoms were introduced in 2015 and gave retirees more flexibility in how they accessed their pension funds. With the increased flexibility came a greater degree of responsibility too.
As well as the more traditional annuity option – a regular income guaranteed for life – it also became possible to take your whole fund as a lump sum and to opt for phased drawdown.
Choosing how to take your pension is a big decision and can have a range of tax implications. So, seeking financial advice should be something that you consider as you move towards your retirement.
Having a long-term financial plan in place also has measurable benefits. Independent charity and think-tank, the International Longevity Centre (ILC), recently conducted a report into the benefits of receiving financial advice and found that those who seek advice are better off than those who don’t.
They found that:
Those who received financial advice between 2001 and 2006 were more than £47,000 better off, on average, by 2014/16 than those who took no advice
Pension pots were 50% higher, on average, for those who saw an adviser regularly, compared to those who only took one-off advice at the start.
Real financial planning has a genuine, and calculable, impact on your assets and the amount of money you take into retirement. Not only that, but it could also impact when you enter retirement and the type of retirement you enjoy.
If you want to create a financial plan that works for you, please get in touch. Email team@tfp-fp.com or call us on 01621 851563.
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