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Top 10 tips for employees retiring this year
Here’s a list of top 10 tips for those employees thinking about retiring this year.
1. Estimate how much income they will need – employees should consider how much money they need to meet their day-to-day living expenses (household bills etc) and discretionary expenditure (holidays and hobbies, etc). In retirement, individuals will likely pay less income tax and no national insurance, while mortgages and loans may be paid off. They also won’t be making pension contributions and children are likely to be financially independent. As a result, their income need is likely to be significantly less than what’s required during their working life.
Recent research from The Pensions and Lifetime Savings Association (PLSA) found that a single person now needs a post-tax annual income of:
• £10,900 for a minimum standard of living in retirement (this would cover all needs plus enough for some leisure activities such as a week’s holiday in the UK and eating out occasionally);
• £20,800 for a moderate standard of living (a two-week holiday in Europe and more frequent eating out);
• £33,600 for a comfortable standard of living (covering all needs plus enough for leisure activities such as holidays and meals out);
• A couple would need £16,700, £30,600 and £49,700 respectively.
2. Is retirement affordable? – Employees should check if they have enough put aside to be able to afford to retire, or whether they need to work longer or perhaps part-time. Most people live longer than they expect. The Office for National Statistics estimates life expectancy in the UK for people aged 65 will be 85 years for men and 87 years for women.
3. Pensions are not the only source of income – When it comes to retirement, there are many assets such as ISAs, shares and general savings, which can be used as sources of additional income.
4. Don’t pay unnecessary tax – Usually only the first 25% of a defined contribution (DC) pension is tax free (the calculation for a defined benefit scheme will be different). The remaining 75% is taxed as income. Unfortunately, many employees pay more tax than they need to. For example, some take their pension as a cash lump sum, not realising that it made them a higher rate tax payer. It may be better to take a smaller amount each year from their pension, keeping within their tax bracket, topping it up with ISA withdrawals, as this is tax free.
5. Decide how to access pension income – An employee with a DC pension, can access their savings from age 55 and will need to choose between income drawdown, buying an annuity, taking it as a cash lump sum or a combination of these options.
With a defined benefit (DB) pension, pension income is usually based on a rate set by the scheme (the accrual rate) and typically is a percentage or fraction of the person’s salary for each year they have been an active member of the scheme. A DB pension usually has a set retirement age.
However, they may be able to receive benefits earlier or later than this. Some may want to transfer their DB pensions into a DC fund to have greater flexibility. However, it is important that employees understand the advantages and disadvantages, as well as the associated risks such as falling for a scam, buying inappropriate retirement products, paying more tax than necessary and, ultimately, running out of money.
Many companies also offer their employees financial education and guidance.
6. Shop around – Employees should make sure that they shop around before buying retirement products. Which? found that the difference between the cheapest and most expensive income drawdown plans for a £250,000 pot was £12,300 lost in charges over 20 years. It is important to not only check fees, but make sure it suits their needs and that they can withdraw cash when they want it and for as long as they need it.
7. Keep beneficiary details up-to-date – Pensions can be a tax efficient way to pass on wealth upon death and are not usually subject to inheritance tax. When a DC pension holder dies, the pension provider chooses who receives the pension pot. You can inform the provider of your wishes by nominating beneficiaries, so it is important that employees keep these details up to date.
8. Regulated financial advice can support employees through retirement - Increasing numbers of people are accessing pensions through income drawdown. However, Pensions Policy Institute research has found that cognitive decline during retirement may make it more difficult for some people to make appropriate decisions about their savings in their older years.
Employees need to realise that regulated financial advice may actually cost the same, if not less, than buying retirement products, such as annuities, through some online brokers. An adviser will look at an individual’s assets, work out the most tax efficient way for them to fund their retirement and put a plan in place that will support them through retirement.
9. Beware of scams – Scammers often use highly professional looking websites and marketing literature to lure people in and tend to sound completely legitimate. It’s easy to see why many people are fooled. Between January and May 2021, pension scam losses totalling over £2.2m were reported to Action Fraud.
Whatever they’re planning to do with their retirement savings, it’s vital they check whether the company that they’re planning to use is registered with the FCA . The FCA’s ScamSmart website includes a list of companies operating without authorisation or running scams www.fca.org.uk/scamsmart.
10. Make an informed decision – The ability to access pension income in a way that works is a great option, but it is also a frightening or overwhelming prospect for many. It is vital that employees ensure that they fully understand all of their options, to choose what is right for them.
Jonathan Watts-Lay is director of WEALTH at work
This article was provided by WEALTH at work
Supplied by REBA Associate Member, WEALTH at work
WEALTH at work is a leading financial wellbeing and retirement specialist - helping those in the workplace to improve their financial future.
