A personal blog about life, business and money – not to be regarded as Financial Advice
Women are living longer, being more active and having more choices in life than ever before, which can make organising your finances and planning your retirement overwhelming, confusing and one of those things that get consigned to the ‘nice to do’ list.
So many people are retraining to do their dream job, and then working until they are older – retirement these days is for many people simply the time when they want to work less hard rather than stop work completely.
When you do decide to step back a bit from work, how can you ensure that you don’t run out of money, and get to spend your time doing the things you love, with the people who are special to you and not end up having to make the choice to go back to work full-time or live a super-frugal lifestyle?
There are two things to consider to ensure you don’t run out of money and live the retirement you dream of.
- How much income will you need when you retire – and
- Where it will come from
So let’s chat a bit more about that – so that you know what to do next!
See how much money you actually spend each month
Retirement spending in many ways will be similar to the way you spend now, so the first step in the process is to take a good look at where your money currently goes and then see what might be different if you were no longer working (or working part-time).
Effectively you need to do what my mum would have called ‘balancing the chequebook’ – write down how much money comes in each month, then deduct all your essential direct debits – things that you need to spend each month– mortgage/ rent, car loan payments, minimum credit card payments, utilities, car/home/life insurance, etc. Or you could use a budget planner – if you’d like a copy of the one I use please click here it’s an interactive PDF so it’ll even add the numbers up for you!
Once you’ve done this it will tell you how much money you have left to spend on food, clothing, travel, socialising and any other costs that you may want to spend.
For you to live a good standard of living now, and not be accumulating credit-card debt or eating into your savings you need to be sure that you’re currently bringing in more than you spend each month.
In the second (future) column of the budget planner, you need to see if each cost will increase or decrease in retirement. You are likely to have repaid your mortgage, and won’t need to pay for your commute – but will you need more money for socialising, holidays and days out? Now you know how much money you’ll need each month to cover your essential costs, and your ‘nice to have’s – we need to work out where that money will come from!
Retirement Income Sources
1. Will you get a State Pension?
To get a full SRP you will need 35 years of National Insurance contributions. You can check your NI record on the gov.uk website to see if you will have the required years. If, in the past, you have been on a low salary (or not working at all ) and didn’t pay National Insurance Contributions then you may have gaps for those years, unless you choose to make up the contributions voluntarily or received NI credits because you claimed child benefit for a child under 12.
You may also have gaps if you were in a company pension scheme that contracted out of SERPS – but the shortfall will be covered by your company pension.
But, even if you do qualify for a full SRP – what sort of quality of life would you have on £712 a month? You’ll need a way to top up this income if you don’t want to have to work forever.
2. Will you get a private or company pension?
If you’ve changed jobs more than once, you could have a myriad of pensions dotted about all over the place and it can be really hard to keep track of them all. You should receive an annual statement from each EVERY year – and if you don’t, they may have the wrong address for you and you should contact them to update your details.
Even if you only have a single pension, the likelihood is that although you may open the annual statement to look at the pot value, it will then get consigned to a drawer, or however you store paperwork at home.
It’s time to dig it out and see what it will be worth to you when you choose to take it.
There are 3 main types of pension scheme – it’s important to know which you have, as it determines how you get to take the money and what happens to it when you die.
a. Final Salary (defined benefit) – The NHS, Local/central government, teachers and old schemes from big companies like Boots, Sainsbury’s, Currys etc.
These give you a guaranteed income until you die, then your SPOUSE gets a pension for their lifetime (usually half of your pension). You cannot assign this pension to anyone else if you are not / no longer married, and the fund dies with you.
They’re designed to give you peace of mind for life to know your bills are paid, but they can be seen by some as inflexible, and with retirement looking different these days may not suit everyone.
You have to wait until the scheme retirement age to take the money, which is often 60 or 65, and if you want to take it earlier there is a hefty penalty. All this information will be on your annual statement.
You usually have the option to get some tax free cash (TFC) in return for a lower guaranteed pension, but to take the cash you must start drawing the pension income, which if you’re still working elsewhere means you will be paying tax on the pension income, and it may push you into a higher rate tax band.
b. Money Purchase schemes – an older style, often from an employer – held with Aviva, Zurich, Pru etc.
In simple terms, over the years, you (and sometimes your employer) pay into a pot which is yours to spend at retirement. They were designed to replicate the old ‘final salary’ schemes but were cheaper for employers to run as the money you receive is entirely dependent on the performance of your pot and the fund(s) that it contains.
You can take 25% of the pot at retirement (any time after 55) as tax-free cash, but the rest you must either take out in full at the same time (which can cause a massive tax bill) or use the balance to buy an annuity – a guaranteed income for life.
The problem is that annuity rates have plummeted in recent years so your pot may not buy as much income as you’d like. You also cannot take the TFC and leave the rest to take later, which can result in you drawing income you don’t need if you’re still working, and paying tax on it.
Your pot can be paid to a dependant or spouse but otherwise forms part of your estate on death and is paid to your executors to distribute, which is then liable to Inheritance tax.
c. Money Purchase schemes – new-type
On newer plans, you still get the 25% tax-free cash but on the rest of the pot you then get what they call flexi-access drawdown, so you can dip into the remaining money as and when you wish – giving you the freedom to take more in early years when you are likely to be more active and healthy and want to take more holidays, days out with the grandchildren or other activities and less later as you begin to slow down.
You can leave your pension to your choice of beneficiary, and they can withdraw the money and spend/ invest it themselves or leave it in the form of a pension in their own name – so reducing your IHT Bill by keeping the money outside of your estate.
If you take a look at the paperwork and have no idea which type of pension you have or you need help working what’s what – please let us know!
3. Will you still be able to draw income from your business?
If you’ve set up your business so that you have staff or subcontractors, or have created a passive income stream (music/book royalties etc.) it is possible that you will be able to take a step back from your business in the future and still draw an income of some kind.
To do this you’ll need to set up systems and processes that mean that the business can run without you needing to physically do all the work.
Ok – so I’ve done all that – what now?
Now you should know how much money you NEED to pay bills and essentials, and how much you WOULD LIKE to ensure you have a comfortable retirement.
How does this compare to what you will have coming in from guaranteed sources? How far short are you per month? What does this work out per year?
Add up the value of your money purchase schemes – is this amount enough to cover the shortfall each year for the number of years you will be retired?
If yes – BRILLIANT!
If no – It’s time to come up with a plan to fill in the shortfall – how about you get in touch to chat about how we can help.
The earlier you get started, the longer your money will have to grow!