Planning retirement is harder than ever, as the pandemic and cost-of-living crisis have destroyed carefully laid plans.
Jonathan Watts-Lay, director of retirement specialist Wealth at Work, said older workers need to plan now to see when they can really afford to stop working.
Your expenses are likely to change in retirement, so work out how much you’ll to cover essentials like household bills, and spending on holidays and hobbies. “Take rising food and energy prices into account.”
Next, tot up all your pensions, savings and investments, and check what inflation protection they have. “Some final salary defined benefit schemes automatically increase income with inflation, but most do not.”
A single pensioner needs income of £12,800 a year for the “minimum” retirement lifestyle, while couples need £19,900, according to the Pensions and Lifetime Savings Association.
For a “moderate” retirement income allowing a two-week European holiday and eating out several times month, a single retiree needs £23,300 a year rising to £34,000 for a couple.
Here’s a guide to how much pension you need to hit those targets.
Remember that most people live longer than they expect, which means their pension needs to last for longer as well, Watts-Lay says.
Average life expectancy at 65 is around 85 years for men and 87 years for women.
One positive is that you are likely to be paying less income tax and no National Insurance when you retire. “You may also have cleared our mortgage and loans, will have no more pension contributions, and your children are likely to be financially independent. If so, retirement could cost less than you think.”
If short of cash, consider delaying retirement or working part time, Watts-Lay said. “Working on brings in extra income, which could allow you to top up your pension pot, too.”
It will also allow time for your existing pension to recover from the recent stock market shock, boosting its value when you finally do retire.
Remember that if you have already made withdrawals from your pension, other than your 25 percent tax-free lump sum, something called the Money Purchase Annual Allowance kicks in. “This limits the amount you can pay into a pension to just £4,000 a year.”
Beware taking too many pension withdrawals in one tax year, as you could unwittingly push yourself into a higher income tax bracket as a result.
“You may be better off drawing a smaller amount each year from your pension, keeping within your tax bracket, then topping it up with withdrawals from a tax-free Isa if you have one,” Watts-Lay adds.
Always shop around before you buy any retirement products, as costs can vary greatly. “As well as charges, check whether it offers you the freedom you need.”
You also have to decide whether to leave your pension invested in drawdown to grow, or lock into an annuity instead.
Most now opt for drawdown but annuity income has risen sharply over the last year. Today, a 65-year-old with £100,000 pension can buy around £7,000 income for life, up from less than £5,000 at the start of last year.
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Alternatively, you could mix and match, leaving part of your pension in drawdown and using the reminder to make annuity purchases over the years. “Consider taking independent financial advice, which may often cost the same as buying retirement products, such as annuities, through online brokers.”
At this stage of life it is more crucial than ever to avoid scammers, who prey on people heading into retirement to cheat them out of their entire pension pots.
Beware fraudsters offering free pension advice or a pension review, investment opportunities or a tax refund.
Always check that any company that you are planning to use is registered with City regulator the Financial Conduct Authority, Watts-Lay said.
The FCA’s ScamSmart website includes a warning list of companies operating without authorisation or running scams.
Anyone over 50 can discuss their options with free and impartial government-funded guidance service Pension Wise.