First, let me say congratulations if you’re planning to retire next year. I hope you’ll enjoy the rest of your life, but one thing that might hold you back from truly living it up until you take your last breath: finances. When you’re retired, you shouldn’t be working to earn money. That’s because if you are, you’ve missed the whole point of being retired. Here’s what I’m going to do for you; I’ll provide you with some knowledge and try to dispel any fears or worries that might otherwise get in the way of your enjoyment in life. Let’s do this!
Money and Budgeting for Retirement
The only way to be sure you’ll get enough money to enjoy a comfortable retirement is to ensure you’ve covered the basics first.
Work out How Much Money You’ll Need When You Retire
Work out what kind of lifestyle you want in retirement. Do you want to continue living in the same house or move? Do you want to travel more? Will your children be moving out? How much will these things cost?
Look at your current monthly budget, including mortgage or rent payments, insurance premiums, utility bills, and other regular outgoings. You can also use our budget planner tool to see where all your money goes each month.
UK Pensions
This handy tool determines how much pension you’ll get from the state pension and other sources like private pensions, investments, and annuities.
There are three main types of pension in the UK:
- Occupational pensions
- Private pensions
- Auto-enrolment (workplace) pensions
- State Pension
You receive tax relief on contributions to a pension. The amount of tax relief you get will vary and depends on your highest marginal income tax rate and how much you earn.
Occupational Pensions and Defined Benefit Pensions
Occupational pensions are built into employment contracts and are usually offered by larger companies or public service organisations. They’re funded by both the employer and employee and sometimes by other parties, such as trade unions.
A defined benefit (DB) pension pays you a guaranteed income for life. Your pension benefits are linked to your earnings and length of service.
Private Pensions
Private pensions, also known as:- Personal pensions
- Defined contribution pensions or ‘DC’ pensions
- Money purchase pensions
They’re paid for entirely by the individual. Your employer doesn’t need to be involved at all. The pension you’ll receive from a DC pension is based on how much you contribute each month plus the investment return you earn on your money.
DC pensions can include anything from a basic stakeholder pension to a self-invested personal pension or SIPP. A stakeholder pension offers an inexpensive way to build your savings, usually with a limited selection of investment funds. Conversely, a self-invested personal pension (SIPP) gives you complete control over your investment options.
Auto-Enrolment (Workplace) Pensions
This is a DC pension set up by your employer. Both you and your employer contribute to it. In all other aspects, they’re the same as a private pension.
The State Pension
The UK State pension is a yearly payment made by the government to people who have reached pensionable age. It’s designed to provide a basic income for retired people who have paid National Insurance contributions over their working life.
The state pension is also known as the Basic State Pension, the basic state retirement pension, or the New State Pension.
How much State Pension you get will depend on how long you’ve worked and how much you’ve earned. See what you’ll get for up-to-date figures. If you need clarification on whether you’re entitled to the full State Pension, you can request a State Pension forecast.
Generate Income From Your Pensions
You may have heard the terms “pension liberation” or “pension freedoms,” which refer to how you can access your private or workplace pension fund.
Take Your Pension as a Lump Sum
You can take your entire pension as a lump sum, but there are significant disadvantages, including being hit with a huge tax bill that will leave you struggling financially.
Buy an Annuity
You pay a lump sum to an insurance company, which will pay you an income for life. You can choose one that pays a fixed amount yearly or varies with inflation and the stock market.
Flexible Access Drawdown
Flexible access drawdown is an alternative to buying an annuity that allows you to take up to 25% of your pension fund as a lump sum and then draw a regular income from it.
The main advantage of flexible access drawdown over buying an annuity is that you are not tied into buying a particular type of pension for life.
You can change the amount of income you receive or even stop taking payments altogether at any time.
However, there are risks attached to flexible access drawdown. Your money remains invested, and you may have less money available later in retirement than expected.
What Tax Will You Pay on Your Pension?
When you take money out of your pension fund, you’re liable for income tax on the amount you receive. Up to 25% of your fund, subject to certain limits, is tax-free, and the balance is taxed as income. Your tax depends on how much income you receive during the Tax Year. Most pensions are taxed at source under the PAYE system.
UK Tax Breaks in Retirement
We’re all aware that the UK tax system is ridiculously complicated. Still, it would help if you were mindful of some tax breaks you’ll be eligible for when you retire.
- ISA allowance: ISAs are a great way to save for retirement and reduce your tax bill simultaneously. You can invest up to £20,000 in an ISA each Tax Year. Your savings grow free from personal Income and Capital Gains Taxes, and your withdrawals are also tax-free.
- Dividend income allowance: The current level of dividend income allowance is £2,000 (2022/23). You can receive up to this dividend amount and pay no tax.
- Personal savings allowance: The personal savings allowance (PSA), introduced in 2016, provides a tax-free allowance. For 2022/23, for Basic Rate taxpayers, it applies on the first £1,000 of your yearly savings income. It reduces to £500 for Higher Rate taxpayers and nil for Additional Rate taxpayers. The PSA applies to interest received on cash held in banks and building societies and National Savings & Investments (NS&I) products.
- Capital Gains Tax allowance: You can reduce your potential Capital Gains Tax (CGT) bill by using up your Annual Exempt Amount of £12,300 (2022/23) each year. This can reduce or possibly eliminate CGT when you sell an investment.
Investment Strategy in Retirement
You will want to make your money last longer than you do, and there are some simple steps you can take to achieve this.
If you’re planning on retiring soon, it’s essential to consider how your investments will perform throughout your life. It would help if you considered the rate at which your money will grow, the rate at which you will withdraw from your pension pot, and how long it will last.
A cash flow forecasting tool is the best way to do this is by using a cash flow forecasting tool. This will show you what impact drawing an income from your savings will have on the future value of your assets.
Equities (stocks or shares in companies) tend to deliver higher returns over time than other investments, such as bonds or cash deposits. However, it’s also important not to put all your eggs in one basket. Investing everything in just one asset class could expose you to too much risk if something goes wrong. Instead, try diversifying your savings across multiple asset classes.
Your Home
Home is where the heart is and also where the money is!
For many people, their home represents their most significant asset. And it’s often where they spend most of their time, so it’s essential to know how to get the most out of your home, both financially and emotionally, as you age.
Staying Put or Moving?
If you’re thinking about staying in your current home, consider these questions:
- Do I need a bigger or smaller house?
- Do I want to downsize?
- Do I want to move closer to family or friends?
- Will my children be moving away from home?
- Do I want my grandchildren close by?
How Green is Your Home?
Check your home’s energy efficiency from its Energy Performance Certificate (EPC). If it’s not very efficient, there are many things you can do to make it greener. For example, installing double glazing will reduce draughts and improve insulation, while fitting an eco-friendly boiler will save money on gas and electricity bills. You may also be eligible for free grants towards these improvements through the Government’s Green Deal scheme.
Energy bills
The cost of heating and lighting your home can significantly drain your income. If this is the case for you, think about ways to reduce your bills by:
- Insulating walls, loft spaces, and water pipes will reduce heat loss through walls and floors. Consider fitting double-glazing windows.
- Turn down the thermostat by one degree and see if you can live with it for three months. If not, turn it down one more degree. If you don’t notice the difference, ask your energy supplier if special tariffs are available for older people who need less heating.
- Buy energy-efficient appliances such as washing machines and dishwashers if needed. They use less electricity than older models and last longer too!
Home Security
As you get older and more vulnerable, home security becomes increasingly important. Burglary is the biggest crime against the elderly and one of the easiest to prevent. Make sure your home is secure with locks on all doors and windows, a burglar alarm system, safety chains on outside doors, and good-quality locks fitted.
Retiring Abroad
More and more people are choosing to retire abroad. The number of Britons living in the EU is expected to rise by 2 million by 2030.
However, living abroad may only be for some. It can be a daunting prospect, and having a good grasp of your finances will be essential if you plan to move overseas. So what are the pros and cons of retiring overseas?
The Cost of Living Abroad
The cost of living in Europe is considerably lower than in the UK, particularly if you choose a country where English is spoken widely. You may also benefit from lower taxes, which would leave more money for you to enjoy during your retirement.
Healthcare Overseas
The UK has a universal healthcare system, meaning everyone can access free medical treatment on the NHS.
Suppose you are retiring overseas and want healthcare in your new home country. In that case, you must secure private medical insurance before leaving home. Suppose you don’t have this cover and fall ill abroad. You would be treated as an ‘overseas visitor’ with all the associated costs.
Buying a Foreign Property
If you’re considering purchasing a property abroad, remember that there may be tax implications depending on where in Europe it’s located and how it’s owned, whether jointly with your partner or not. Suppose you’re buying a property with your partner. It’s important to remember that the tax laws of your new country of residence may require you and your partner to be married to qualify for homeowner tax breaks.
UK Pensions Paid Abroad
If you plan to retire abroad, consider how your pension will be paid if you move outside the UK.
If you have a UK pension, it’s crucial to understand how it works and what happens if you move overseas. You may want to retire in a country that doesn’t offer state pension top-ups, such as Australia or New Zealand. In this case, checking whether there is a reciprocal agreement between countries is vital. A reciprocal agreement typically means that your UK state pension can continue to be paid abroad.
Leisure Activities
When you retire, it’s time to relax and enjoy life, but what will you look forward to doing?
People who retire often find that they need something to occupy their time. Hence, they turn to hobbies, sports, and other activities.
If you’re looking for a new hobby to try after retirement, here are some ideas:
- Study: Learn a language or take a course at the local community college. You can also study topics that interest you in your own time by reading books on the subject or taking online classes with an educational website like Udemy or Coursera.
- Sports: Playing sports is one of the best ways for retirees to keep fit and have fun at the same time. Make sure that any sport you choose is easy to participate in. If you haven’t played for years, or if it requires much movement from your joints, there might be better options for someone older or with mobility issues. Swimming, golfing, and bowling are great sports for older people who want to stay active but don’t want to put too much strain on their joints.
- Crafts: If you’ve loved arts and crafts but have not had much time for them before now, retirement might be the perfect opportunity to learn a new skill.
Starting your Own Business
If you want to retire but are not ready to give up your career, starting your own business is a great way to keep working while still enjoying the freedom of retirement.
Starting your own business in retirement can also be a great way to keep your mind active and engaged. It might be something that you’ve always wanted to do. Or, it might be something that has come about through necessity when you realise that the job market isn’t what it used to be and you need another source of income. Starting a retirement business can be rewarding and lucrative, provided you do it right.
Retirement is the opportunity to try something different that fulfils a long-term ambition to start your own business. However, it’s essential to consider the implications of this on your finances before you take the plunge.
People think you need a lot of capital to start a business. This is not true, although the more money you have available, the better equipped you will be when things hit the fan, which they almost certainly will at some stage.
A cash reserve is essential if you plan to go into business full-time. Without it, you cannot fund yourself through the early stages of starting up until customers start paying invoices. Suppose you only plan on running the business part-time alongside other commitments. In that case, having enough from other sources, such as your pensions or other investments, is more important.Looking for Paid Work in Retirement
Deciding to work in retirement is a big decision. You’re not just choosing what you will do, but where and how often. There are many factors to consider when selecting retirement employment, including:
- Is your health up to the task? Suppose you have chronic medical conditions or disabilities that might be aggravated by working. In that case, leaving those jobs off the table might be best.
- What’s more important? Your pay or the tasks you will perform? If money is tight, accepting a lower-paid job may be worthwhile. Especially if it will allow you time during the week to spend with family or volunteer in your community.
- What kind of work environment do you want? Some people thrive in busy offices, while others are overwhelmed by too much activity around them. Likewise, some people prefer working alone while others need interaction with other people all day long. Make sure your chosen position offers an environment that meets your mental stimulation and social interaction needs.
No One is Immortal
As we all know, no one is immortal. Sooner or later, death will come to us all. It’s a question that many people have pondered but rarely discuss. What happens to our estate when we die? It’s such an uncomfortable thought. Most of us would much rather go out on a high with family, friends, and a “must-attend” funeral than worry about post-mortem administration. However, it’s vital to consider what will happen when you die.
Wills & Intestacy
In England and Wales, it is possible to pass on your estate without a will by intestacy (this is where the law decides where your assets go). However, this may not be what you would want or expect. There are often consequences for beneficiaries who feel they still need to receive what they think they should have been entitled to under your will.
The main advantage of a will is that it ensures that everything is distributed exactly how you want it to be. It makes sure who and how much of your estate each person receives. A solicitor can advise you on this and help you write up your wishes legally, so there’s no doubt about how things should be divided after your death. You don’t need to use a solicitor. If you do, they will charge for their services – usually around £200-300 for basic wills but more for complex ones involving trusts or joint ownership of property or other assets.
Inheritance Tax
An inheritance tax is a tax on the estate of a deceased person.
There are different types of inheritance tax in other countries, but they all work the same way. In England & Wales, if you die with an estate worth more than £325,000 (as of 2023), your estate may have to pay some inheritance tax.
The inheritance tax you’ll have to pay depends on how much your estate is worth when you die. You don’t have to take out life insurance or buy investment bonds to avoid tax if you inherit large amounts of money from your parents or grandparents. Still, you can reduce or even eliminate the liability if you make plans.
Conclusion
Remember, being honest and open with yourself and your loved ones about your retirement plans is essential. Be sure to reach out for help to enjoy your retirement when and if needed. Make the most of your retirement years—they will fly by before you know it. Good luck!
