There are many things to consider if you plan to retire from work in the next few decades.
We’ve compiled a list with seven things that you should do before retiring to help you plan for the next stage of your life.
1. Timing is important
People used to retire around the 65th th anniversary. But, there have been changes in the way you can receive your pension. This has made it much easier to stop working. These days are gone when you can take a ‘cliff edge retirement’ and work one last day.
Your pension can be accessed from 55 years old and you can spend as much or as little as you wish. Many are choosing to slow down, perhaps by working part-time or taking on another role in the company. However, many retirees return to work after a few years.
Increased flexibility leads to greater complexity. You now have many options and more to choose from. You could base your retirement timing on:
- Your family situation
- Your future income goals and your income
- Your health
- You can decide whether you wish to continue working in the same capacity or in a different one.
Consider when and how you want to retire.
2. Think about your goals
Which type of retirement are you looking for? You should start to think about your future goals and aspirations in the years leading up to retirement. How you spend your retirement can help you determine how much income you will need.
Sun Life’s FT survey found that five of six over-50s still have items on their “bucket list”. It is possible to have big plans for retirement. However, you should start thinking about how you will be able to pay for these goals.
Consumer advice charity What ? We spoke with thousands of retired people about their expenses. They spent an average of PS2,220 per month for each household, which is equivalent to PS27,000 annually. Their research indicated that you would need around PS42,000 per year to enjoy more luxury items such as long-haul holidays or a new car every five.
Plan ahead to save money and reach your goals.
3. Pay off your debt
These lifestyle spending figures assume that you won’t have a lot of debt in retirement.
You should repay any debts, particularly high-interest borrowings like credit cards or overdrafts before you lose your steady income from work. It is important to pay off your mortgage as soon as possible.
Paying off debts before you retire can ensure that your pensions and other savings are used only for their intended purpose: to provide the lifestyle you desire.
4. Find out from where your income comes.
Your retirement income won’t come only from your pensions. A report by the Office for National Statistics found that more than half of couples who are pensioners have earned their income from earnings. This is because more people work longer hours and take on more flexible jobs.
Consider all of your investments and savings in the lead-up to retirement. Determine what kind of income you can expect when you retire.
5. Set aside a rainy-day fund
Experts recommend that you keep between three and six months’ worth of expenses as an emergency fund during your working life. This money should be kept in a cash savings account that is easily accessible. It’s intended to cover unexpected expenses and everyday necessities in the event you lose your job or become incapacitated due to long-term illness.
In retirement, it is important to have a rainy-day fund in case of unexpected costs. You won’t feel affected by the loss of your home or your finances, no matter what the situation.
It’s a good idea to keep cash reserves in case of volatility so that your pension is not withdrawn. To withdraw from an invested pension in times of market down, you will need to sell more units and therefore your pension pot to get the same income.
6. Make sure your money can outlive you
Budgeting is essential at all stages of your life. Recent research by Zurich on retirees who are currently receiving flexible pension income revealed that only 34% of them had calculated the amount they needed to pay for their daily living expenses.
Worse, only 22% of respondents had budgeted for non-essential expenses, such as dining out or taking a vacation.
Recent Financial Times survey found that 72% said that their clients’ greatest fear was losing their pension savings.
You run the risk of running out of money if you don’t budget. Royal London statistics show that only half of those in drawdown have a high chance of their income lasts their lifetime. After budgeting for your regular expenses, consider how long you will live and plan accordingly.
7. Reduce inheritance tax by taking steps
IHT is a tax that is added to the estate’s value upon your death. It currently stands at 40%. There are two ‘Nil Rate Bands’ that you can choose from, which means that IHT is not payable up to the maximum. These are:
- The current PS325,000 per person Nil-Rate Band is the current PS325,000
- The Residence Nil Rate Band is currently at PS150,000 but will rise to PS175,000 by 2020/21. This rate was created to allow you to pass your home to your family. You must give your home or a portion of your home to your grandchildren or children in order to receive this allowance.
There are many ways to reduce or eliminate tax bills if your estate has a value greater than the Nil Rate bands. There are many options to pass wealth to loved ones rather than the taxman.
- Royal London reports that 59% of UK parents don’t have a Will or aren’t familiar with the process. It’s easy to reduce your tax bill and ensure that your estate is distributed in the way you desire.
- You can leave everything to your spouse, whether you are married or in a civil partnership. Your entire estate will be left to your spouse. They will not pay any IHT. They will also inherit any unused Nil Rate bands. According to current rules, this could mean that they will be exempt from IHT up to PS950,000
- Give it away – Gifting any type of asset is exempted from IHT if the recipient lives for seven years following the gift’s making
- You can use your annual exemption – you are allowed to gift up to PS3,000 per year by using your annual IHT exemption. This gift can be given immediately without affecting your estate. You can also gift it up to PS6,000 once you haven’t used it in the previous year.
- You can use a trust to put assets in trust. This is a nominating of assets for the benefit and protection of others. There are many trust types in the UK that can be used to fulfill different purposes. One example is IHT mitigation.
- Donate to charity – If you make a donation to charity or include a donation to your will, it is immediately exempted from IHT. You can also leave 10% to more charities than 40%. This is an incentive to reduce your IHT rate to between 40% and 36%.
The sooner you can mitigate Inheritance tax, the better. This advice is not always being followed. The amount of inheritance tax paid has more than doubled in the last decade to PS5.2 billion in 2017/18. This is around one in twenty estates that are liable for this tax.
