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Retirement opens the door to exciting possibilities like travel, hobbies, and spending more quality time with loved ones, but it can be overwhelming to think about all the financial decisions surrounding it.
In the lead up to leaving work for good, pension pots, annuities and tax-related questions have become increasingly important and tackling these less-exciting details will allow you to enjoy the fun without the extra stress later.
To help ease the transition, we enlisted the help of retirement expert Robert Cochrane scottish widows, Who have outlined five essential financial questions to ask yourself before stepping into this next chapter of life…
1. Should I combine my pension pots?
“Track any lost pensions using the government’s pension tracing tool and consider whether you should combine them into one so it’s easier to manage – it could even save you money,” says Cochrane. “I would also recommend visiting PensionWise, which is the government’s free service for those over 55.”2. How much state pension am I entitled to and when will it start?
“Look at when your state pension is due and how much you are on track to get,” advises Cochrane. “The HMRC The app is really good for this. It tells you on the homepage when your pension is due to start, and what you are on track to receive.
3. What kind of retirement lifestyle can I realistically expect?
“The Pensions and Lifetime Savings Association (now called Pensions UK) created something called three retirement life stage profiles – minimal, moderate and comfortable – and they are based on expenditure in retirement,” explains Cochrane. “It takes into account factors such as how often you’re going to change your car, what kind of holidays you want to go on, the cost of broadband and how much you spend on gifts.
“These standards have been set at the individual level and at the doubles level, and at the doubles level they are much more achievable.”
According to the Pensions UK website, the minimum living standard is set at £13,400 a year for a single person and £21,600 for a couple. A moderate standard of living requires £31,700 for a single person and £43,900 for two, while a comfortable lifestyle is defined as requiring £43,900 for a single person and £60,600 for a couple.
“There are a number of different tools on the Pensions UK website where you can choose the type of retirement you want and then see what you’re actually on track for,” says Cochrane.
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4. Do I know the tax implications of retiring?
There are several different ways you can access your pension savings, and there are tax implications for each of them.
,One One of the most common mistakes people make is not thinking about taxes enough,” says Cochrane. “Since pension freedoms were introduced, people are using their money earlier and taking lump sum withdrawals more often. ”Most people who access their pension at the age of 55 will be able to take 25% of their pension tax-free, but if you take it as income in one go you maximize the tax you pay. So, I would encourage people to know what the tax implications are. Before they start withdrawing any money.
5. Do I need a pension annuity? If yes, what type?
“Annuity is a guaranteed income for life and it is an irreversible decision. So, once you make that decision, you have to stick to it,” Cochran highlights. “There are different types of annuities with all kinds of guarantees, but one of the most popular, which pays the highest level of income, will be based on a single life with no guarantees.”
Despite its popularity, Cochrane emphasizes that it’s not always the best type, especially if you’re in a couple.
“This is because on average women live longer than men and men traditionally have larger pension pots, so if a man goes and takes a single base annuity for the highest potential income he can get without any guarantees, when he dies his spouse will get nothing from that fund,” Cochrane says.
“So it’s especially important for couples to talk to each other about this. Are you willing to give up a typically small amount of initial income to have guaranteed income for your loved one upon the death of your first spouse?”