Budget for Retirement
Determine how much income you will have in retirement; state pensions, private andor occupational pensions, investment income, state benefits (you may qualify), part-time workgradual retirement. You may find www.direct.gov.uk/ and the pensions advisory service useful in determining state pensions and benefits. Your employer can tell you how much an occupational pension scheme will pay in retirement. For private pensions get an overall value of the pension then talk to us to determine the level of income it could provide – never accept the pension provider’s quote for retirement income until you have investigated the alternatives as you are likely to get more income if you shop around.
Determine your outgoings; hopefully, your mortgage is repaid, you will no longer be paying into pensions, children have left home, the cost of getting to work is eliminated. However, new costs may arise; more time for holidays, new hobbies, Grandchildren. Day to day living expenses remain; food, utility bills, insurances, repairsmaintenance for home and car, clothes, Christmas, etc.
Don’t forget about inflation!
Many retirees have a fixed level of income; income from investments tend to remain static; pensions may or may not be linked to inflation and when they are the level of inflation experienced by retirees is generally higher than the average experienced by the country as a whole. Without employment there is no scope to increase income from promotion or by working more hours, so your ability to react to the effect of inflation may be limited thus leaving you financially vulnerable later in life.
Review your Investments
One of your biggest investments may be your pension fund, while this remains invested in anything other than cash it will be volatile. Imagine what would happen if there was stock market crash just before you are due to retire? Your pension fund could fall dramatically and this would affect your income throughout retirement. If you cannot afford to see a drop in income then it may be prudent to reduce your exposure to volatile funds as you approach retirement.
You may have other investments that can provide an income through retirement and there will be a cash lump sum available to you when your pension is converted to income. Again, consider the effect of inflation on your investments. For example, many people place their money on deposit – this is one of the lowest risk investments to hold but you may find that the returns are less than the rate of inflation, in which case the value of your money is being eroded – more so if the income supports your expenditure and is not being re-invested. A proportion of your money should always remain on deposit for ‘rainy days’ but if you need an income then it may be worth considering something a little more risky for a better rate of return.
Evaluate your net worth
Add up all your assets and subtract your liabilities. Do you have life assurance polices that are not in trust? if so you might want to consider the effect these could have on your net worth on death as the proceeds will form p[art of your estate when not in trust. Is your estate worth more than the current Inheritance Tax Threshold? (£325,000 as at 6th April 2011 and until5th April 2015)? If so, there could be a tax liability on your death – if this is of concern to you then there are things that you can do to mitigate this tax. Married couples can utilise each others IHT allowances. This is complicated subject beyond the scope of this site, we recommend that you contact us for more information.
Another point to consider is the effect of care. People are living longer but with this comes exposure to illnesses that may incapacitate and require specialist care. Local Authorities can apply a charge to a persons estate in the event of them needing local authority care – the bill can run into £tens of thousands. Married couples can change the ownership of their property to Tenants in Common which will effectively protect half the value of their home should one of them require care. Again, a specialist subject – please contact us for more information.