Your Guide to Funding and Enjoying Your Retirement
Retirement is an exciting time. Many people look forward to the day when they can give up the daily grind and dedicate more of their time to themselves, their family, and their interests. But retirement can also be costly. Many retirees have to make do with an income that is significantly lower than their working income – and, with the cost of living constantly increasing, money can be a real worry.
So it is vital that you give proper consideration to financing your retirement. There is a huge number of options available to you, above and beyond the State Pension or the Occupational Pension that you might receive from your employer. In addition, there are many financial concerns that you need to understand and address.
Financing Retirement is here to help you grasp those issues, understand their implications, and make effective plans to ensure that you can afford the retired lifestyle you would like.
1. How does the State Pension work?
The State Pension is the bedrock of many retirees’ income. Once you reach the State Pension age, you will almost certainly be entitled to some payments under the system for the rest of your life.
The maximum a single person can receive in basic State Pension payments is £102.15 per week for the 2011-12 tax year. But it is important to understand that not everyone receives the same amount. Your entitlement will depend on the number of ‘qualifying years’ you have built up, and whether or not you have also contributed to the additional State Pension.
The State Pension is not particularly generous. Even those who qualify for the full payment, but rely solely on the basic State Pension, could receive as little as £5,800 a year. Therefore, many people choose to investigate ways to supplement their pension or look at alternatives to pensions.
2. What about personal and occupational pensions?
Occupational pensions (that is, pensions from your employer) remain among the UK’s most popular method of financing retirement. There are many potential benefits associated with occupational pensions – including significant tax breaks. Most people receive tax relief on all their pension contributions – although there are upper limits to that relief.
You might also choose to contribute to a personal pension – for example, if your employer doesn’t offer an occupational scheme (as is common among small firms), or if you are self-employed. There is a range of different types of personal pension available. Many people favour the stakeholder pension, which was designed to provide a flexible, affordable way for people to save for their retirement.
3. What is an annuity?
Depending on the type of pension you contribute to, you may be expected to buy an annuity with part of the fund when you retire. An annuity is a product that pays you an income using the money you have saved in your pension fund.
You will normally be required to buy an annuity if you have contributed to a money purchase or stakeholder pension scheme. But you will also be able to take up to 25% of the fund as a lump sum, tax free, when you retire.
4. Will I qualify for benefits?
Depending on your personal circumstances, there is a range of state benefits to which you might be entitled in retirement. The Pension Credit is perhaps the most important. This is divided into the Guarantee Credit and the Savings Credit, which are designed to top up pensioners’ income to a minimum level, and reward those who make their own financial provision for retirement.
In addition, you might qualify for vital benefits like the winter fuel allowance and cold weather payments.
You should also note that you might be entitled to certain council benefits – for example, to help with the cost of housing.
5. Will I have to pay tax?
Many people presume that they will no longer have to pay tax once they retire. In fact, if your total income in any tax year exceeds the annual personal allowance (for those aged 65-74, it is currently £9,940), you will still be expected to pay the taxman. We have compiled a simple guide on this site to help you understand whether or not your pension income will be subject to tax.
6. How else can I invest for retirement?
Of course, pensions and benefits are not the only ways in which you can finance your retirement. In addition to these, you might choose from a range of savings and investment products and techniques to help you afford the lifestyle you would like.
ISAs, or Individual Savings Accounts, are a particularly popular way of saving for retirement. They allow you to put money away tax free – and, just as importantly, you can have instant access to your cash.
You might also choose to invest in stocks and shares, either in the hope of their value increasing or in order to receive the dividend payments. You should remember, though, that this can be risky – particularly in an uncertain financial climate.
If the world of savings and investments is an unfamiliar one, you might want to read our investment tips to help you understand the range of techniques on offer.
7. What if I work after retiring?
Contrary to the beliefs of many, retirement doesn’t have to mean the end of your working life. Instead, many retirees choose to pursue work – often in a completely new field. Re-entering the world of work can be challenging. To help make the transition as smooth as possible we have put together some tips to help you craft a great CV, along with a guide to getting the best from a job interview.
Rather than going to an office, many retirees would like a job in which they can work from home. While opportunities of this sort are available, you should be wary of things that appear too good to be true – and you should make sure that you familiarise yourself with the telltale signs of a scam.
8. How can I cut my outgoings?
It is common for retirees to want to live more frugally, particularly if they are relying on a restricted income. Although living on a pension can be a struggle, there is a range of ways in which you may be able to cut your outgoings.
Pensioners can take advantage of discounts on a range of everyday services including public transport. There is also a range of cheaper communication options that can enable you to keep in touch with friends and family in a more affordable way. You might also consider ways in which you can eat well for less, something that is particularly important as food prices continue to rise, and save on household bills.
9. What about my property?
Many retirees rely on their property as the foundation of their financial planning. If you own your home, you might be considering equity release or remortgaging in order to free up cash. While this can be a good choice for some people, you should be aware of the risks. You should be particularly sure that you would be able to afford any ensuing repayments.
You may also be considering other ways to make money from your property. In particular, you might think about taking in a lodger. Again, while this could be a great way to make some extra cash (and perhaps to have some company), you should make sure that you understand factors like the potential tax implications – and that you are comfortable with any agreement into which you enter.
If you don’t own your own property but would like to, you may come up against some problems when it comes to mortgages. Although many lenders will consider extending credit to retirees, you are likely to find securing a mortgage more challenging than you would if you were in work. We have put together some hints to help you find the cash that you need.
It's Never Too Early to Start Planning
Retirement is a major life event, and many people find themselves understandably concerned about the realities of their post-work life. But with some basic forward planning and a good grasp of the issues that you might face in retirement, you can help to ensure that you have enough cash set aside – and that you make sensible, effective choices about the ways in which you use that cash.
It's never too early to start thinking about your financial future – and perhaps to begin putting some money away. The sooner you get down to the nitty gritty, the better equipped you will be to provide yourself with the lifestyle you would like in retirement.
Finally, you should remember that everyone’s circumstances are different, and always seek independent advice before making any major financial decision. Happy planning!
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