Five top tips for preparing for impending retirement
1. Do your sums.
Draw up an estimate of the income realistically needed to sustain your standard of living. Deduct those outlays which may not exist after retirement (such as mortgage payments) and add items that may represent extra spending (perhaps you intend taking more holidays when retired). You could also use some of the tax-free lump sum of up to 25 per cent of your pension that you can take to pay off or reduce any outstanding debts.
2. Drawing Benefits
If you have a personal or a defined contribution workplace pension (as opposed to a defined benefit/final salary) there are two main options for taking income in retirement. One is to purchase an annuity, which will pay a fixed sum for the rest of your life. Once this commitment has been made there is no going back. The other is to leave the benefits invested and draw an income via the “drawdown” method, which can differ from year to year What is best will depend largely on individual circumstances so professional advice is strongly recommended.
3. Beware a last minute slump
Check the level of investment risk within your personal pension, otherwise you may be shocked to find the value seriously reduced by any stock market volatility close to retirement. This is especially important if you are taking the annuity route (as opposed to drawdown) as it involves disinvesting your pension fund and using all the proceeds (excluding any tax-free cash taken) to purchase the annuity.
If in good health, there is always the option of working longer. You could boost the value of your pension pot by delaying retirement for a few more years (thus maintaining contributions and delaying use of the fund). Another option is to save more between now and the date of intended retirement, perhaps by increasing your pension contributions and taking advantage of the tax relief that goes with them. However, your funds will remain invested so you should review the level of underlying risk and whether this remains suitable.
5. A holistic approach
Pensions represent only one method of retirement funding so, if you can afford to do so, try and factor other financial assets into your overall planning. Stocks and shares – particularly those in Isas – could be used to generate additional income in retirement.
• Richard Johnston is a chartered financial planner at Murray Asset Management.