Cash clinic: Considering retiring soon? Think carefully before that final step

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Kevin Garfagnini, director at Mazars Financial Planning, answers your queries.

QI was planning to retire soon but I’m having second thoughts, what with all the changes to pensions and needing to save more money. I’m wondering whether it would be financially prudent to try to carry on working as long as I can. Is this feasible? What do I need to think about?

JR North Berwick

AIt might sound obvious, but the most important question to ask yourself first is, can I afford to retire? When working this out, consider three fundamental issues initially and then set a retirement budget accordingly. These issues are:

Firstly, what level of income will you require (now and in the future)? Secondly, what are your existing sources of income and capital and how much income will they provide? And finally, what are your objectives, goals and aspirations for retirement?

By doing this, you will quickly work out if you can afford to retire now or whether you would be better off delaying.

If you carry on working, you could continue to contribute to your company or personal pension. This is a tax-efficient use of funds and should mean a larger pension pot from which to take income when you retire. In the event of your death before pension benefits are taken any beneficiaries will have a larger tax-free pension pot.

However, if your retirement is imminent, the “risk profile” of your underlying pension funds should be closely monitored. You don’t want to keep making contributions into a fund which is falling in value due to poor investment performance.

If you decide to take benefits from your pension plan, don’t “sleepwalk” into accepting what your existing pension provider offers. You are free to shop around and see what other companies are offering.

Delaying the purchase of an annuity (pension income) until you are older should mean an increased annuity rate and increased income. However, this is not guaranteed as annuity rates could fall, which could mean a smaller income even with a bigger pension pot.

If annuity purchase is delayed and you develop an illness in the intervening period, an enhanced annuity – paid out if you have ill health or lifestyle habits such as smoking – could give a better rate and larger income. It’s an unfortunate fact of life that health deteriorates with age and it’s worth taking this fact into account when planning retirement.

Around 1,500 conditions can result in insurance companies offering you a higher income. These range from high blood pressure through to diabetes and cancer.

If you do defer your state pension – which you must do for a period of at least five weeks – you will get a 1 per cent increase for every five weeks deferred, equating to a 10.4 per cent increase each year.

Health needs to be taken into consideration as there is no point in having an increased pension if paid out for a substantially shorter period of time. If deferred for a period of 12 months or more, the deferred pension can be taken as a lump sum. The amount paid will be the deferred amount plus interest at 2 per cent above Bank of England Base rate for the term of the deferment. This could be helpful if you need a lump sum for a particular purpose, and/or do not require the funds immediately on retirement.

There is no easy answer but it’s important to weigh up the alternatives and do some number crunching before making your decision.

Research from MGM Advantage shows that after failing health, lack of money is the next biggest worry for people entering retirement. If you are thinking of retiring, remember, you have options and choices on how to take and maximise your pension income.

By rushing the decision now, you may potentially be missing out on thousands of pounds of lost income for the rest of your life and won’t get the best value from your pension savings. The best advice is to take independent financial advice to be sure you cover all the options.

• Kevin Garfagnini is director at Mazars Financial Planning

If you have a question you need answered, write to Jeff Salway c/o The Scotsman, 108 Holyrood Road, Edinburgh EH8 8AS or email:

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