Fifty-somethings: Retirement planning – time to act for your dreams of retirement
Get your retirement plans ship shape with our ten year countdown.
It’s highly likely that only one in four fifty-somethings is financially prepared for retirement and one third have no retirement savings at all. It is the steps you take in the ten year countdown to retirement that can have the most significant effect on the size of your eventual pension, potentially making or breaking your retirement plans.
Fifty-somethings have benefited from significant improvements in health and longevity: retiring at 65, men can expect to live to 82, and women to 85. However, fifty-somethings’ private savings have been hardest hit over the last few years: suffering a mix of poor investment returns, historically low interest rates and declining annuity rates. Women are particularly ill prepared for retirement, having on average half the pension savings of men.
Despite these financial problems many people will take no action to change their investment strategy, alter their retirement plans or protect their pension funds. Ignoring the problem completely is likely to make it significantly worse. We’ve put together a countdown to retirement, which, whether you are ten or five years away, should help with your retirement planning.
Ten years to go
Find out what you are worth
Before you can draw up financial plans for the future, you need a clear view of your current position. A starting point should be to establish what your likely state pension entitlement would be. This can be done by completing a form BR19, available at www.direct.gov.uk.
You should also seek advice from your adviser, who will be able to provide pension forecasts from private plans.
How much retirement income will you need?
Look at how much income you will need in retirement and if there is a gap consider taking advice. For many people what they are expecting to receive is considerably less than what they would like. You need to maximise savings during this ten year period – not only in pensions but in other investments such as ISAs. You will need to consider whether options such as retiring later or working part time beyond your retirement date may be a more realistic way of meeting your retirement goals.
Review your investment strategy
It is not only how much you save but where it is invested that can make a real difference. Use the opportunity to carry out a review of existing pension plans; look at where they are invested, how they have performed and what charges are levied on them.
Get advice about whether it makes sense to consolidate existing pension plans. As part of the review, your adviser can look at the diversification of your assets, as this can help protect them against sudden market movements. With a ten year time frame the risks of equity investments compared with fixed interest and cash based products needs to be considered.
Generally, the nearer to drawing your pension you are, the less investment risk you should take. But over this period it is reasonable to include equities within a mixed portfolio, particularly given the very low interest rates currently available from cash desposit accounts.
Five years to go
Review your retirement goals
Get up to date pension forecasts and review your retirement plans. Is retiring at the age you planned still realistic and achievable?
Taking the safer option
Consider taking advice on moving stock market based investments into safer options such as cash, bonds or gilts. If there is a sudden market dip, you may have insufficient time to make good any losses.
Save what you can via pensions, ISAs and other investments. This, along with your current pension pot, will have to produce enough for your retirement. If you have outstanding debts, such as a mortgage or credit cards, you could consider using spare cash to reduce them.
Consider your retirement options
Don’t leave it until the last minute to decide what you will do with your pension plan. Many people fail to consider their options properly and simply buy the annuity offered by their pension provider. This can significantly reduce your income in retirement and there is no second chance.
There are now more retirement alternatives, from investment linked and flexible annuities to phased retirement options, and drawdown plans. It is worth spending time working out which is most likely to suit your circumstances.
Six months to go
Seek financial advice
Talk to your adviser about your options; if you are considering an annuity, make sure you use the open market option to get the best rate. Those who smoke or have health problems are likely to get a better rate to reflect their reduced life expectancy.
An alternative to purchasing an annuity is to leave your pension invested, and take a portion of the pension pot each year as an income: This is known as a drawdown, which has the advantage of potentially leaving your family some legacy when you die, as your pension pot can pass on to your spouse or dependents.
Your adviser will also be able to give you an up to date valuation of your pension plans, calculate how much income you are likely to receive in retirement and recommend the most suitable option for you.
Consider deferring retirement
You may qualify for a bigger pension if you defer taking it. If you opt to do this you need to contact the Pension Service. You do not have to make National Insurance contributions if you work beyond your retirement age and any additional money earned can still be saved in a pension plan.