Retirement Planning Advice: Retire on Your Own Terms

The UK State Pension represents just 17% of average earnings, according to The Organisation for Economic Co-operation and Development (OECD). UK retirees will therefore almost certainly need to rely on other sources of income to fund an adequate lifestyle in retirement.

Some of the most frequent questions we are asked around retirement funding and crystallising benefits are:

• How much money do you need for a happy retirement?
• When can I retire?
• How should I draw my pensions?
• Should I consolidate my pension plans?

So here are some pointers to help you retire on your own terms:

1.     You should understand your spending habits in 3 ways:

Essential Expenditure – bills that must be paid and are very hard (if not impossible) to reduce.

Lifestyle Expenditure – cost of things that are important for you to maintain and are associated with how you want to live your life (for me it’s going to the gym and eating out!).

Discretionary Expenditure – cost of things that are a nice to have or desired, but have a lower priority. (e.g. that special holiday that is only paid for if you can afford it after everything else….)

Categorising your expenses in this way will help with budgeting in your working life, but more importantly, it will help you to understand what costs to prioritise in retirement.

2.   Check your State Pension Forecast

Understand how much you might get, when you can get it and how to increase it (if you can).

For most, the full UK State Pension of £203.85 per week (2023/24) is not going to be enough to cover even essential bills such as food, utilities, basic clothing and personal care.

Knowing this amount will help you to calculate your retirement income shortfall and understand what further funding you need to put into your retirement planning.

3.   Understand your Pensions

Depending on how many times you change your job, you may accumulate different pension arrangements through the workplace.

A Defined Benefit scheme, also known as a final salary scheme, will pay you an income in retirement depending on how many years you’ve been working and the salary you earn. Your annual statement will give you a good idea of how much you’re likely to receive based on this and from when.

Defined Contribution schemes (for example, where an amount is ‘invested’ on your behalf each month) can be more complex to forecast. This is because the retirement income you will receive will depend on factors such as:

• How your pension investment funds perform
• The level of ongoing plan and fund charges
• The contributions you and your employer make
• Does the pension plan provide any guarantees
• The retirement options you choose

Get into the habit of monitoring them annually to understand your pension as best as you can. Feel free to get in touch with us for any further information.

4.   Review, Review, Review

Your annual retirement projection or ‘illustration’ will estimate how much income you can expect to receive based on your pension value. How does this forecast compare with your budget? A word of warning however, these projections are based on generic assumptions and may not reflect your particular set up.

Here at Piercefield Oliver we prefer to use cashflow planning tools, which allow us to forecast based on reasoned and reasonable assumptions specific to you. This helps us to understand how long your resources are going to last (considering important factors like inflation, investment growth and contributions) as well as any other resources you have available for retirement (such as ISAs, savings and other investments).

Reviewing regularly in this way will help you to understand if you are on track for the retirement you envisage.

Although this may sound obvious, saving a few extra pounds per month in the early years of your working life has the potential to compound into thousands of pounds which can be used in retirement.

5.   Consider all options at retirement

Don’t just opt for the tax-free cash lump sum or the pension drawdown. Make sure you consider all of your options carefully before making a decision with your retirement funds.

This is particularly important for Defined Contribution schemes which provide more retirement choices by way of:

• Annuities
• Lump Sum Withdrawals
• Drawdown facilities

You can also consider a combination of approaches. We have found that guaranteeing an income which covers essential outgoings as a bare minimum can provide a valuable foundation for effective retirement planning, whilst other flexible options can be used to help fund those discretionary spends that may just be a one off.

Making your retirement choices should also reflect your attitude to risk, your capacity for loss (how much can you afford to lose) and risk required (how much return do you need to achieve your retirement income objectives).

6.   Be wary of pension consolidation!

There are two main reasons why people look to consolidate their pensions, it’s to either access modern pension flexibility or to help keep things simple, – but be careful it can lead to long term disadvantage.

Take a balanced view when considering a transfer, and fully understand what you are giving up. This means looking at:

• Retirement options
• Investment choices
• Charging structures
• Guarantees or enhancements
• Exit penalties
• Death benefits

As I have highlighted above, annuities can actually provide a great foundation – so don’t just move pensions around for the sake of it.

It’s important to note that everyone is different and there are different pension options to suit your particular needs and objectives. Don’t be afraid to seek independent financial advice, as it may help to avoid costly mistakes. If you’ve got any questions regarding pensions or retirement planning, it would be great to hear from you.