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Retirement Planning: How to Ensure You're Prepared

planning your retirement

To be comfortable in your retirement, you need to plan everything well in advance. When you eventually leave the workforce, you should know exactly what kind of shape your finances are in, and it's a good idea to come up with a plan of how you're going to stay active and social. This will help you to make sure your change in circumstances doesn't take too much of a toll on your mental and emotional wellbeing. 

To make retirement as easy as possible, we're going to outline everything you need to do to prepare. We'll explain when you can expect to retire, help you to work out how much money you'll want to put away before then, and outline some jobs you mightn't have even thought about.

What is the average retirement age in the UK?

The average UK retirement age is 65.1 for men and 63.6 for women, according to Which?. Although, the State Pension age is currently 65 for men, and it's gradually increasing from 60 to 65 for women. This is soon to change, though, and the State Pension age will increase to 66 for both men and women by October 2020. Further increases are planned, too: it will rise from 66 to 67 between 2026 and 2028. The government has a calculator, which is designed to tell you exactly when you'll be eligible to access your State Pension.

The rules surrounding retirements will be kept under review, and factors such as changes in life expectancy could lead to further adjustments in the future. And, it's worth noting that your State Pension age might be different to the age you can access your workplace or personal pension.

Can I retire early?

Technically, you can retire at any age, although you can only claim your State Pension when you reach the appropriate age. When it comes to personal and workplace pensions, you'll need to ask each provider about the earliest age you can claim your pension benefits.

If you're retiring because of ill-health, you might be able to access your money early. And, if you've fallen ill and have been told that your life expectancy is less than a year, you can retire regardless of your age. You can claim up to 100% of your pension fund as a tax-free lump sum and, if you're married or in a civil partnership, up to half of your pension fund can be retained by the scheme and used to provide for your partner in their retirement.

If you're thinking of retiring early, it's important that you make your decision very carefully, because it's likely you'll eventually receive less when you reach State Pension age than you would if you had continued working. This is because your pension accumulates as you build up enough 'qualifying years'. These are tax years in which you've earned enough to pay National Insurance Contributions (NICs). It is possible to pay voluntary NICs to boost your record if you like.

How much money do you need to retire?

How much money you'll need to save for your retirement will depend heavily on what kind of lifestyle you would like to have once you leave the workforce. Experts typically suggest that you'll need around half to two-thirds of your pre-retirement salary in order to maintain the lifestyle you're used to. But, if you're planning to take more holidays or make any extravagant purchases — perhaps you've always wanted to have a holiday home abroad — you will need to budget for this.

However, most people overestimate how much money they'll need in their retirement. Chances are, you will have paid off your mortgage, brought your children up, and won't have to pay for your commute anymore. This will save you more than you might think.

As a rough guide, the average retired household spends slightly less than £2,200 a month — or around £26,000 a year — according to Which?. This covers all the basic areas of spending and some luxuries like European holidays, recreational activities, and meals out. If you would like to enjoy other luxuries, such as long-haul trips and a new car every five years, your household pension pot will need to provide you with an annual income of £39,000 to sustain this kind of lifestyle.

How much do I need to save for retirement now?

How much you need to be saving in order to have a comfortable retirement depends quite heavily on your current age. Pension experts Scottish Widows have calculated that, in order to receive an annual retirement income of £23,000, someone who starts paying into their pension at 25 will need to put aside £293 every month. If you leave this until you're 35, your monthly savings will jump to £443, and then to £724 if you begin saving at 45. Those who leave it until they're 50 will have to put away £1,445 a month. So, it clearly pays to get a head start on building your pension pot.

How can you get your finances in order before retiring?

If you're approaching retirement, it's best to get your finances in order sooner rather than later. This will help to make the transition much easier and ensure that you get the most out of your pension pot. Here, we'll talk you through some of the steps you'll need to take.

Know how to claim your State Pension

You typically won't receive your State Pension automatically, so you'll need to be proactive when you're approaching State Pension age. Around four months before you can claim your pension, you should receive a letter and advice booklet from the Pension Service. If you don't, you can call them on 0800 731 7898 to request one.

Deal with any outstanding debts

Nearly one in five people expecting to retire this year still have debts to clear, and those in this position owe an average of £33,900, according to research by Prudential. It seems like the problem is becoming more prominent, too: for example, those expecting to retire this year have debts nearly 40% higher than those who were looking to retire last year.

When you consider that paying off debt in retirement will take an average of three and a half years and cost £285 a month, it goes without saying that it's wise to clear as much of your debt as possible while you're still working. But, of course, that can be easier said than done. So, here are some steps you can take to get out of the red before retirement.

Dip into your savings or pension

Love Money says that, if you've thought ahead and already have some savings put away, it usually makes sense to pay off your debts rather than continuing to pay higher rates of interest. This is especially true now, when saving rates are particularly low.

While it can feel disheartening to see your hard-earned savings disappear, just remember that paying off your debts as quickly as possible will mean that it costs you less in the long run. Chances are, you've put money away to make your life in retirement easier and more comfortable, so see clearing your debts as another step in that process.

Keep working for longer

This mightn't be the answer you're looking for, but even working part-time later in life can give you some extra money that you can then put towards paying off your debts. Of course, if your retirement has been prompted by an issue such as ill health, this might not be an option for you. And, you'll have to consider the costs associated with continuing to work, such as transport. But, if you are able to carry on working until your debts have been cleared, you're likely to be a lot more comfortable once you do leave the workforce.

Make some sacrifices

If you haven't yet made any adjustments to your household spending, doing so could provide you with the money you need to pay off your debts. While making sacrifices is never fun, it's sometimes necessary. And, it'll all be worth it when you retire without a mortgage or credit card balance to deal with.

Keep track of all your spending for a month and look for areas in which you could be making some savings. For example, could you walk to work instead of taking the car, or start taking packed lunches to work rather than buying a meal deal every day? You could even look at changing your utility suppliers or home and car insurance policies. You might be surprised by how much you could be saving every month.

Prioritise your debts

If you have multiple debts to pay, it's worth working out which ones need to be paid first. For example, some debts will be more pressing because they have higher interest rates, which could lead to them spiralling out of control if they're left for too long. Plus, you'll want to deal with any debts that threaten your quality of life: for example, if you fail to pay your mortgage or utility bills, you could be cut off or even evicted. So, it's important that you look to clear debts of this nature first.

Consolidate your debts to make life easier

If you have multiple loans or credit cards to pay off, it might be easier to combine them. You may even be able to consolidate everything down to a single debt with one creditor who can provide you with an action plan.

Balance transfer credit cards can be particularly useful if you're looking to go down this route because they can help to save you paying high levels of interest as well as giving you more time to clear your debts. You'll just have to make the minimum monthly payments (although, we would always recommend paying more to become debt-free quicker).

Trace any old pensions you have

If you've changed jobs throughout your life, there's a good chance you'll have pensions with more than one employer or provider. To ensure you're claiming everything you're entitled to, it's vital that you track these down. 

Don't worry if you've forgotten to log everything as you've gone along — the Pension Tracing Service can help you to get up to speed. It's free to use, and you don't need to have the contact details of any pension providers you've used. But, having some information about your previous employers on hand will definitely help. If you can, it's best to provide: 

  • The name of your previous employer and/or pension service
  • Any previous names the business had
  • The type of business it was
  • Whether it changed address
  • The dates that you worked there

Once you've given the service this information, it will present you with the contact details of the pension provider in question. You will then need to get in touch with them, so you can discuss whether you actually have a pension with them, what value it is, and how you can arrange for it to be paid out. 

Decide how you want to use your pension pot

If you've been saving into a defined contribution pension scheme while working, you'll need to decide how you plan to make the most of this money when you retire. Each option will come with its own set of rules, fees, risks, and tax regulations, so you will have a lot to think about. Plus, not all pension providers will offer every option, which means you'll need to talk to the company you've been saving with in order to work out exactly where you stand. 

Your first option is to close your pension pot and take the whole amount as a lump sum. Or, you could treat your pension like a bank account that you can make cash withdrawals from. Although, you should do plenty of research first, because not all pension providers can handle cash withdrawals, and you may have to pay high fees or tax charges. There may also be a limit to the number of times you can make a withdrawal. 

You could also buy an annuity, which will provide you with a guaranteed monthly income for life (or a specified period). However, once you've done this and decided on the income you would like to receive, you can't change your plan or provider. It's also important that you check how flexible a plan is — for example, you might want to increase your income to account for the increased cost of living with inflation, so you'll need to make sure this is possible. It's also important that you're aware some providers require you to have paid a minimum amount into your pension before you can purchase annuity.

If you're willing to take a risk with your pension pot, you could use a drawdown scheme, which will transfer some or all of your pension into a pot that will then be invested on the stock market. You can draw income from this investment, but fees may be expensive, and your income won't be a guaranteed amount. And, of course, your investment can increase or decrease depending on the performance of the stock market or the economy.

Before you choose what to do with your pension, it's also worth considering the fact that some of these options might affect benefits you currently receive, or your eligibility to claim a benefit in the future. Withdrawals or investments may be counted as income or capital, which could affect means-tested benefits, such as: 

  • Pension credit
  • Housing benefit
  • Council Tax support
  • Income support
  • Income-based Jobseeker's Allowance, Income-related Employment and Support Allowance

So, think very carefully before making any withdrawals.

Know how you can make your money go further

Whether you think you're all set for a comfortable retirement or you know you haven't quite saved enough, it's worth knowing how you can boost your income after you retire. As you get older, you might find it harder to make ends meet, so this will help to prevent you from struggling. Here, we'll give you some tips that will help your money to go further.

Check whether you're eligible for any benefits

Age UK claims that £3.5 billion worth of benefits go unclaimed by older people each year. So, it's important that you don't just assume you aren't entitled to any. Even if you're sure that you've claimed everything you're eligible for, it won't hurt to check. You could be missing out on pension credit, housing benefit, or attendance allowance, and it's worth looking into it. The UK government has a guide to calculating what benefits you can claim, which will make this process easy for you.

Trace money you had forgotten about

If you've changed your name, address, or who you bank with a number of times, you might have some money stored away in lost bank accounts, pensions, or premium bonds. If you think this could be the case, retirement is a great time to track down this cash. Age UK has a guide to tracing lost money, which explains everything from how money can go missing to what you'll need to do to reclaim it. Follow the advice in the article and you could find yourself with some extra funds that will make life less stressful for you. 

Cut your costs

Many people transition into retirement without considering that they might be paying too much for their council tax or household bills. Regardless of whether you're worried that your money mightn't stretch far enough, it's worth looking into whether you could be making any savings. Get in touch with your local council and ask whether you're eligible for any tax reductions and look to see if you could be paying less if you were to switch to different utility providers. You might be surprised by how much less you could be paying.

Decide where you want to live

There are a range of reasons why people decide to move in retirement. For example, they may not longer need the space that a family home provides, or they might want to cut costs. Of course, some people prefer to stay put, and there's no right or wrong route to take. But, we're going to outline some of the property options you have, so you can make sure you make the right decision for you.

A bungalow or smaller house

As we've explained in our guide to downsizing, it's common for people to move into a smaller home when they're preparing for retirement, especially if they've brought up children that no longer live with them. If you're in this position, you might decide to move to a similar property to the one you currently live in, only smaller. For example, if you have a four-bedroom family home, a one or two-bedroom property might be more suitable (and more affordable). 

If you have mobility problems, or you want to move into a property that will work for the long-term, a bungalow might be more suitable because you won't have to contend with a flight of stairs every day. Most of us will find getting around harder as we age so, even if you're still relatively young, it's well worth thinking ahead.  

A retirement village

If you're looking to spend your later life somewhere that's designed to perfectly suit your needs, moving into a retirement village could be the best choice for you. These complexes usually give you plenty of freedom to live how you wish, while also providing you with the services you might need as you get older, such as housekeeping and a visiting hairdresser. Retirement villages are designed with accessibility in mind, too, which you'll appreciate more and more as you get older. 

A park home

As we explain in our guide to what park homes are and who can buy them, these properties are available for as little as £20,000 in certain areas. This means they can be a great choice for people looking to downsize and release equity from their homes. They also come with a range of other benefits. For example, park home sites tend to be very secure, and often have a community feel, which can be particularly helpful if you're afraid of feeling isolated in retirement. We've covered the pros and cons of park home livingin another guide, which is well worth reading before you decide what kind of property is going to work best for you.  

Move in with family

While it isn't for everyone, if you retire particularly late in life and are from a tight-knit family, you might decide to move in with relatives. Even if they charge you board, this should be significantly cheaper than paying for a property of your own. And, spending time with your loved ones will have the added benefit of beating the loneliness that can sometimes come with leaving the workforce. 

Make sure you're emotionally and mentally prepared to retire

Life will be very different when you retire, so it's important that you ensure you're mentally prepared for the transition. Of course, going from working every day to having a lot of free time can be quite jarring and it's completely normal to feel lost for a little while, but there are some things you can do to make the lifestyle changes easier to handle, and we're going to discuss those here.

Plan how you're going to use your free time

You might be looking forward to having plenty of free time once you leave work. But, while the first few weeks may feel like a holiday, it's likely you'll find yourself feeling bored and a bit lost if you don't make any plans to put your time to good use. So, it's worth putting some thought into what you can do once you leave work in advance of actually retiring. 

Do you have a hobby you could devote more time to, or is there an activity you've always wanted to try? You could even volunteer with a charity or join a sports team. As long as you have some plans in place, it's likely you'll find the transition into retirement a lot easier.  

Look for ways to make new friends

It's likely your social circle will become smaller when you leave work because you won't see your colleagues nearly as much. To ensure you still have plenty of people to speak to and spent time with, it's worth looking for ways you could make new friends in retirement. This will help to alleviate the loneliness that many people associate with retirement.

Look for clubs, sports teams, or coffee mornings in your area that you might be able to join. If you have existing friends who are retiring around a similar time, you could even arrange your own social events. When you leave the workforce, you'll find that there are a lot of people feeling just as lost as you and attending classes or social event designed specifically for the retired will mean that you can meet and bond with those in the same boat. 

Try to embrace technology

If you feel like technology has passed you by until now, considering embracing it as you approach retirement. Having access to the internet is likely to make you feel far less lonely, as you'll be able to join online communities, read about other people's experiences, and look for local activities that you might be interested in.

Setting up social media accounts can make it easier for you to keep in touch with friends, ex-colleagues, and family members. Plus, you can shop and research whatever you need to online. Having a computer, smartphone, or tablet will open a door to a lot more of the world, which you're likely to appreciate a lot more once you retire.

When you retire, a lot will change when it comes to how much money you have and how you spend your time. To ensure you can afford to sustain the lifestyle you want and that you're mentally ready for the transition, it's important that you prepare accordingly. And, the advice we've offered in this guide will hopefully help you to get off on the right foot.