Retirement planning: Can I afford to retire?

When thinking about which age to retire at an important question is, “Can I afford to retire?”, and the answer can be more complex than it might immediately seem. Retirement has changed over the years and people have more choices than ever before, with some people working until much later in life because they wish to, and others starting their retirement young.

Changes to UK legislation in recent years, such as the pension freedoms rules have created more flexibility to decide how you can access personal pensions from the age of 55. Whilst this is great news for most people, being cautious when deciding how to access your pension is strongly advised. Once you’ve accessed your pensions, it can be difficult to go back on the decisions you’ve made if you find your circumstances have changed.

In this article, we discuss the indicators that will help you answer that important question: Can I afford to retire?

How much income will you need?

Firstly, when thinking about whether you can afford to retire, you will want to work out how much income you’ll need in retirement. Whilst it sounds like an open-ended question, it can be answered by using approximate figures to get to an estimated amount. Remember that if you retire before state retirement age, which is currently 65, you will not be able to access the state pension until then. Also, your personal pension pots and savings will need to last longer than it would if you were beginning retirement later in life.

Start by thinking about what sort of retirement you would like and try to realistically work out how much annual income you’ll need for your desired lifestyle. Some people want to simplify their outgoings, and even downsize in later life. Others have ambitions to travel the world and enjoy spending their well-deserved income and savings. Whatever your retirement looks like, you should pinpoint how much you think you’ll need.

At this point, you may realise that if you were to retire soon, you may not currently meet the level of income you need to sustain the life you want. You can then create a retirement plan that ensures you meet your requirements by topping up your savings with extra contributions. Your financial adviser will be able to support you with this and can help you explore your retirement income options.

What are your retirement income sources?

People are living longer than they used to, with an ageing population growing globally. The cost of healthcare increases steeply from around the age of 65. These kinds of costs should be taken into account when planning for retirement as life can take an unexpected course, and you do not want to risk running out of money.

With that in mind, your income sources at retirement should be clearly outlined before you start the process of retirement planning. Do you know exactly how many pension pots you have, and how much they’re worth? Sources of income may include multiple personal pensions, old employer pensions, savings, income from property or dividends and the state pension, once it becomes accessible. It’s possible to purchase an annuity from your pension pot that pays out a specific income for the rest of your life. The amount you can get will naturally be based upon the size of the pot and varies with different providers.

Another option that you may be considering is to continue to work but part-time, or doing something different than you currently do. Some might argue that you are not retiring if you’re still working, but it may be that working part-time is all you need to slow down and feel that you have more time to do the things you want.

Investing for retirement

Once you’ve realised what your income goal is for retirement, you can think about how you might want to change your current investments to make them work harder for you. If you don’t already have a Self-Invested Personal Pension (SIPP), it may be worthwhile to open one. With a SIPP you can choose your own investments and you benefit from the same tax reliefs as an employee pension. A Stocks & Shares ISA is another investment account that is protected from income tax and capital gains tax, so you may wish to open one to spread your investments across different accounts when retirement planning.

The level of risk you take on in your investment may be somewhat higher if your retirement is still a while off. This can be reflected in a heavy weighting towards the more volatile equities as opposed to the lower risk bond markets. If you are realistically going to retire soon, it is best to maintain lower-risk investments so that there is less chance of a decline in your returns during the time that you’ll be looking to access the funds.

Have you fully utilised annual and lifetime allowances?

Making use of tax allowances is key to maximising your retirement income. Most people can contribute up to £40,000 to their pensions annually, tax-free since April 2014. High earners pay tax on a tapered basis since 2016, meaning for every £2 of taxable income you receive over £150,000, your annual allowance is reduced by £1. This essentially makes your annual allowance less, with a maximum reduction of £30,000.

One way of mitigating this loss is by using pension carry forward, which allows you to carry forward any unused annual allowances going back up to three years. Therefore, you should check if you fully used allowances from the previous years so that you can receive the tax-free allowance. Ensure that you start by assessing the previous tax years and including the total value you contributed to pensions, any contributions from your employer and the amount of tax relief HMRC gave you.

Can I afford to retire?

As with any important financial decision, when it comes to retirement planning, we strongly recommend speaking with a financial adviser who can give you quality advice. An adviser can work with you to ensure you are ready to enjoy the retirement you deserve.

To find out more about retirement planning or if you have any questions about financial planning, request a callback.

Capital at risk. Tax benefits depend on your individual circumstances and tax rules are subject to change.