Retirement should be one of the most exciting times of your life, but planning for it can be a daunting, and often confusing experience, especially when a global pandemic has thrown markets into turmoil. With people living longer than ever and pension pots needing to last for an average of 40 years, it has never been more important to have a strategy in place that allows you to live out your retirement safe in the knowledge that you can maintain your financial independence.
You should give careful consideration of the quality of life you are expecting when you stop working, as well as your financial goals. Your state pension is unlikely to be enough to provide the income you need to maintain a comfortable standard of living, to cover your retirement on its own. Are you planning on having enough money to pay for family holidays, buying property, contributing to family wedding costs? You will also need to factor in how your circumstances might change in the years ahead. Post-retirement risks include changes in your life or the life of a loved one, the need for professional caregivers or moving to a facility due to failing health. There are also financial risks that revolve around investments and stock market activities as well as governmental decisions that could affect retirees.
Getting an early start on your retirement plans ensures you are likely to have more money when you retire. That is not to say it is ever too late to plan. The first step you need to take is to check your pensions. Topping up your pension plan can improve your financial security. Making a larger contribution is the obvious way to boost your pension pot, but you might also want to consider diverting some of a bonus to your pension. The tax relief makes a bonus worth more in your pension than in your bank account, so it is important to remember that you do not pay tax on the growth in your pension funds. It can also be combined with other savings vehicles such as ISAs and assets including property to maximise your funds for retirement.
In the current circumstances however, savers and pensioners alike may be looking at drops in their investments. This turbulence will no doubt cause worry, but there are still ways to protect your retirement savings. In the first instance, do not panic. Keep in mind that with retirement savings, you are investing for the long-term, so the drop in value may not be permanent. If you are in a position where you are still building your retirement fund, use this time to review the investments you have made, and consider diversifying your investments across different assets and countries. Having a range of investments from gold to government bonds and absolute return funds are good at capital preservation.
Finally, many retirees plan on supplementing their income by working during retirement, but choosing the point at which you retire is integral to retirement planning. Whilst you can carry on working for as long as you like, it is important to understand that when you retire, you will still be liable for income tax on your pension income if it exceeds your personal allowance. Inheritance tax can also have an impact on your estate, so it is important to put together a carefully considered plan to protect your liabilities. Retirement is no longer linear, some people continue to work into their 60s and 70s, whilst others retire at 45.
Whatever you decide, having a plan is essential, as you will likely be faced with a series of complex decisions that will shape your income for the rest of your life. Even the best laid plans can fail as a result of unexpected events. Although some risks can be minimised, there are a number of potential risks completely out of your control. However, understanding what the potential post-retirement risks are, and considering them in your retirement planning stages can help ensure they are mitigated and properly managed.
Granville Turner is director at company formation specialists Turner Little
Further reading: Pension saving – millions destined for an impoverished retirement