If you are a 50-something, are you financially prepared for retirement? It is estimated that one third of people in this age group have no retirement savings at all. However, the plans you make in the final approach to retirement can have the most significant impact on the size of your eventual pension.
For those in their 50s, pension planning has always been particularly important, but today’s 50-somethings face a series of challenges that no other generation has had to deal with. This age group has benefited from huge improvements in health and longevity; men retiring at 65 can now expect to live into their early 80s, while women of the same age can expect to celebrate their 85th birthday.
Many people currently in their 50s have also seen their pensions and savings squeezed from all sides, with company pension schemes being cut back while the value of the state pension has fallen. Ignoring the problem completely is likely to make it significantly worse.
Planning for retirement is one of the biggest financial challenges people face, and the one you can least afford to get wrong. If you are in your 50s and find yourself in this position, there are steps you can take to improve your pension prospects.
We can help you get your pension planning back on track
Countdown to retirement
– 10 years remaining
Before you can draw up financial plans for the future, you need a clear view of your current position. Do you know what you are worth? As a starting point, people should establish what their likely state pension entitlement would be. This can be done by completing a form BR19, available at www.direct.gov.uk. You should also contact the pension trustees of your current and previous employers, who will be able to provide pension forecasts, as will the companies managing any private pension plans.
You then need to consider how much income you’ll need in retirement. It’s important to be realistic – you may spend less if you are not commuting to work, for example – but don’t forget to factor in holidays, travel and any debts you may still have.
If you are currently on target to receiving less than you’d ideally like, it is essential that you obtain professional advice about how you can make up any shortfall. With ten years or less to retirement, you need to maximise your savings during this period and not only into pensions but utilising other appropriate investments.
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.
It is not only how much you save but where it is invested that can make a difference. We can assist you to carry out an audit of existing pension plans and help you look at where they are invested, how they have performed and what charges are levied on them. It may even be appropriate to consolidate existing pension plans or take steps to protect capital values – there are a number of guaranteed products that could help you achieve this.
As part of this review we can also look at the diversification of your assets, as this can help protect against sudden market movements. With a ten-year time frame, investors need to weigh up the risks of equity investments against safer cash-based products.
Generally, the nearer you are to drawing your pension, 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 returns currently available on cash. Bonds, gilts and some structured products may also provide a halfway house between cash and equities.
Countdown to retirement
– 5 years remaining
During this period we can help you review your retirement goals. It’s also important to obtain up-to-date pension forecasts. Is retiring at the age you planned still realistic and achievable?
As you approach the final five years, you’ll need to consider moving any stock market-based investments into safer options such as cash, bonds or gilts. If there is a sudden market correction now, you may have insufficient time to make good any losses.
If you have any lost pensions and need help contacting the provider, the Pension Tracing Service (0845) 600 2537 may be able to help. The tracing service will use this database, to search for your scheme and may be able to provide you with current contact details. The information can be used to contact the pension provider and find out if you have any pension entitlement.
Potentially you now have just 60 paydays remaining until you retire. So it’s essential that you save what you can during this period, taking advantage of pensions and tax-efficient investments. Remember, this money will have to produce enough income for you to live off for potentially more than 20 years.
If you have maximised your pension contributions, it is also possible to contribute into a partner’s pension plan. So don’t forget to consider a spouse’s pension. If you are a higher earner in a final salary scheme, you should ensure that any additional pension savings don’t breach the ‘lifetime allowance’ as this could generate a tax bill. The lifetime allowance will be reduced from £1.8m to £1.5m from April 2012. Also, if you still have outstanding debts, such as a mortgage or credit cards, you should use any surplus money to reduce them.
Deciding how to take your pension benefits is one of the most important financial decisions you’re ever likely to make. It’s important not to leave it until the last minute to decide what you will do with your pension fund. You need to obtain professional advice and consider your options properly; simply buying the annuity offered by your pension provider could significantly reduce your income in retirement and there is no second chance to make a better decision.
You also have other retirement alternatives available and the freedom to choose when and how you take your pension, with the previous compulsory annuity age of 75 withdrawn. Under the new annuity purchase rules, you are given more flexibility about how you choose to use your retirement savings. You can still convert funds to an annuity if you wish, but you also have more options such as a drawdown pension and continued pension investment.
Countdown to retirement – 6 months remaining
You will need to contact your pension providers to find out how your pension will eventually be paid and to ascertain the value. If you decide to defer your retirement you will have to inform your pension providers.
If you decide to purchase an annuity you should seek professional advice to ensure that you get the best rate. If you smoke or have certain health problems, even minor ones, inform the annuity provider as you may obtain a better rate.
By deferring taking your state pension, you could qualify for a bigger pension. If you opt to do this you’ll need to contact the Pensions Service. If you work beyond your retirement age you do not have to make National Insurance contributions. Any additional money earned could be saved in a pension plan.