Your pension isn’t the only financial asset you’ll have to live on in retirement – ISAs, savings, investments and property can all play a role.
There are three important things you need to consider when planning your retirement finances:
- How will your spending patterns change over time?
- What assets do you have?
- What are your long term plans?
How will your spending patterns change over time?
How you spend your money will change over the course of your retirement.
Many people find they spend more when they’ve just retired – enjoying their freedom from work to travel, take up new hobbies and maybe making big purchases with their lump sum or savings.
As they get older and are generally less active, spending tends to fall. Figures from 2015 research by Prudential, an insurance company, show that a household headed by someone aged 80 and over spends, on average, 43% (or £131) less than a household headed by a 50 year old .
One way to approach retirement finances is to look at what expenses you have to meet – such as bills – and whether any regular guaranteed sources of income you can rely on will cover this.
Funding your retirement
Think about what pensions you might be able to draw on. You might have built up some defined benefit (DB, often called final salary) entitlement, which provides a guaranteed income.
If you have saved in a defined contribution pension (DC, often called money purchase), changes that came in to effect in 2015 give you more freedom in how you could access them.
You can access your DC funds from age 55 and take up to 25% tax free. With the rest of your pot you can buy an annuity, enter into drawdown or take it as cash. Remember that any income you take from your pension is subject to income tax .
You will also likely have some State Pension entitlement built up. The full State Pension is currently worth £159.55 a week, but be aware that the State Pension age is rising , and workers in their 40s or early 50s will be 67 before they can claim it. The government recently announced plans to raise the State Pension age to 68 between 2037 and 2039 , potentially affecting those born between 6 April 1970 and 5 April 1978. Make sure you factor this into your retirement planning.
If you’re able to lead what you feel would be a basic or comfortable lifestyle with your guaranteed income, you can look at how you could use other assets or sources of income you might have.
What assets do you have?
Pensions are often thought of as the main asset people will have to live on in retirement, but they are not the only one.
In the years leading up to retirement, having a plan that makes the most of other assets you might have – such as ISAs, long term savings accounts, investments or property – can make a big difference to your intended lifestyle.
If you have ambitious plans for the early years of your retirement, it’s likely you’ll need accessible funds to achieve these. It’s also a good idea to have a ‘rainy day fund’ of emergency money you can access easily to cover any unforeseen eventualities.
A house is most people’s biggest and most valuable asset, and forms part of many people’s financial plans for retirement. If you don’t own your house outright by the time you retire, you might consider overpaying your mortgage. If not, are you happy to pay a mortgage into retirement, and do you know what kind of impact it will have on your monthly outgoings?
What are your long term plans?
Whatever your plans for retirement, it’s important to make the most of the assets you have to give you the best chance of being able to lead the kind of lifestyle you want. By reviewing your assets sooner rather than later, you can understand whether your plans are on track.
Talking to a financial adviser can help you understand the options available to you and how you may be able to develop your plans. Financial advisers will work with you to create a plan that suits your aspirations, tailored to your individual circumstances.
To find out more about financial advice and how it could help you when planning for your retirement, get in touch with Skipton financial advisers.
Important information: Our recommendations are likely to include stock market-linked investments. These are not like building society savings accounts as your capital is at risk and you may get back less than you invested. The value of your investments and any income from them may fall as well as rise.
Retiresavvy is brought to you by Skipton Building Society. This article has been commissioned by retiresavvy and any opinions voiced are the author's own.