For many people, the fifties are the decade when thoughts turn to retirement. Whether or not you want to retire early, it’s important to know how much you have and what you can do to give yourself as comfortable a lifestyle as possible. I’ve advised dozens of clients in their fifties. Here’s what I’ve found.
Work out what you’ll need
Make a start on a financial plan by estimating how much you’ll need in retirement. A rule of thumb is that you’ll want two-thirds of your pre-retirement income to sustain a comfortable way of life. But this is a rough estimate and people’s needs vary a great deal depending on the individual or household.
In many cases, retirement expenditure will change over time. There are often two or three distinct stages:
- Expenditure in early retirement can be relatively high as new retirees seek to make the most of their new-found freedom;
- Spending can then fall away as retirement becomes the norm and retirees find they spend less on things like travel;
- Depending on an individual’s health, expenditure can increase significantly in later life if care is required.
In your planning, it’s important to consider inflation, which is likely to increase the cost of living while you are retired.
Next, work out what you’ve got
Most people will rely on multiple sources of income or capital in retirement. Assuming you’re eligible, the UK state pension will provide a basic level of income once you’re old enough to claim it.
You may also have workplace or personal pensions. These typically fall into two types:
- Defined benefit schemes pay out an income in retirement that is determined by factors such as how long you’ve worked and what was your final salary;
- Defined contribution schemes are basically cash or investment pots that contain whatever contributions you and your employer(s) have made, enhanced by potential investment returns.
You may also have cash savings, investments or property. It can be difficult to work out exactly what all your assets are worth in total, which is why it might help to talk to an adviser.
Then, structure your affairs as best you can
The good thing about doing retirement planning in your fifties is that you probably still have time to restructure or add to your assets before stopping work for good.
If you have more than one pension pot, one way to take control is to consolidate them. Pension consolidation can save paperwork and help you understand what you have. It might also leave you better off, for example if you move to a new provider with lower management costs (though note that defined benefit and certain other types of pension possibly can’t be consolidated).
Adding to your pension is another option. If you have substantial cash savings, it may be a good idea to use some of these to top up your pension before you retire. Pension contributions benefit from tax relief, an incentive offered by the government to encourage people to invest for their retirement. Tax relief can significantly raise the value of money invested in a pension, especially if you are a higher-rate taxpayer.
A useful trick is that, depending on your income and tax status, you may be able to carry forward your annual tax relief allowance, currently £40,000 in a year. At the extreme, this could allow you to contribute up to £160,000 into your pension in one year in a tax-efficient manner.
Decide whether to buy an annuity or not
In your fifties, you’ll also need to think about some of the big questions facing you as you retire. One of the main ones is to decide whether or not to use any defined contribution pension pots to buy an annuity, an investment product that guarantees a regular income until death.
The known income provided by an annuity will suit some, but this will depend on your situation and the annuity rates available at the time. What you can do instead is leave the pension invested and withdraw from it as needed, a method known as drawdown. In drawdown, you could earn investment returns that increase the value of the pension even as you withdraw from it. You would also have the potential to leave any remaining value to a beneficiary free of inheritance tax (in contrast, annuities and defined benefit pensions typically cease to exist when you die).
On the other hand, in drawdown, you are exposed to investment risk, which means the value of your pot might decline. If you’re struggling to decide whether an annuity or drawdown is right for you, our financial advice team are available to help.
It’s worth thinking about annuities in your fifties, before you retire, because your plans on the subject may affect how you manage your pension pot until then. For example, a pension that’s likely to be converted to annuity in five years’ time should probably be invested differently than a pension that will be retained and drawn upon over a 25-year retirement.
Pensions: good because they’re flexible
You’ll notice we’ve talked a lot about pensions in this article. Of course, a pension is not the only way to fund a retirement. Many people hope to unlock the value of property to pay for their retirement needs, though there are pros and cons to this approach.
Pensions do have advantages, though, and since 2015, they are a lot more flexible than in the past. Once you’re over 55 (likely to increase to 57 or 58, depending on your age now) you can take as much money out of your pension as you like. The first quarter of that money is tax-free and can be taken at once or in chunks.
The rest of your pension is taxable and you have some control over how much tax you pay on it. For instance, you would only pay tax on pension income that exceeds that year’s tax-free personal allowance.
We’re here to help
Whatever structures you use to fund your retirement, you should make sure they are tax-efficient, both leading up to retirement and in retirement, once income and capital withdrawals start. Nutmeg’s financial advisers can help you work out what you need, review existing arrangements and recommend what action to take to improve your position. If you’re in your fifties (or sixties) and looking ahead to life after work, now could be the perfect time to talk to us.
As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. A pension may not be right for everyone and tax rules may change in the future. If you are unsure if a pension is right for you, please seek financial advice.