Can you afford to retire?

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 Please Note: Information in this blog was current at the time of publishing, but may no longer be up-to-date with current legislation. Please visit our blog for the latest pension articles.


As we explained last week, retirement is a potentially daunting time primarily because of no longer being at work or receiving a full salary. This invariably leads to the question, 'Can I afford to retire?'. The answer of course is not the same for everyone, but it doesn't necessarily depend on income - a person may earn £100,000 a year, but if they've saved nothing for retirement and owe a lot in debts then they will be worse off than someone earning much less but who saved aggressively and has nothing to repay.

To help with determining if you are ready to retire, or will be by your planned date, you should talk to a professional about retirement planning. Consider this the equivalent of a medical check-up for your finances, and it should include examination of your earnings, outgoings, how long until you want to retire, your current savings and debts, and the type of lifestyle you hope to have when you stop working.  Retirement planning should also include a pension review, which will explain such things as what you are paying in annual fees, how well the pension is growing, if it may be able to perform better elsewhere, and if it will be able to provide the desired lifestyle in retirement.

You won't need professional assistance for every part of monitoring your financial situation though. For instance, you will know what debts you have (and can calculate how much your interest rate is) and how manageable you are finding them. A few hundred pounds outstanding on a 0% credit card is unlikely to be problematic, but owing £30,000 a year before retirement could keep you awake at night. When looking at your debts don't forget to include everything that qualifies - this means a mortgage and car repayments, not just credit cards and bank loans.

Using a pension for financial planning

UK law currently allows people from the age of 55 to access 25% of their pension pot as a cash lump sum without any tax liabilities. This means that if you have a £100,000 fund, you can take out £25,000 tax free. This option isn't for everyone and depends on individual circumstances, so financial advice must be sought first. Data from our own clients show that the money is overwhelmingly used to tackle or clear debts, with 70% of people using it for that. As there are no restrictions on how this money can be used, this percentage indicates that people are taking charge of their finances in the run up to retirement instead of spending it frivolously. A lack of debt means that the pension income will go further - and with the current state pension only £5,881 a year, it's likely that many people will want to make their money stretch as far as possible.

Calculating the difference between your retirement income and your working income will help you be more accurate in deciding if you're ready to retire, because a big decrease in money could be difficult to manage. With a final salary scheme this won't be difficult (although you won't be able to take out 25% tax-free cash unless you move it to a defined-contribution scheme), but if you have a private pension the amount you earn will be based on multiple factors. A financial adviser will be able to assist with this, and can explain the pros and cons of annuities and income drawdown to help you decide what the best option would be.

A financial makeover will help you to be in the best position as you approach retirement, but it's important to think about the future from as early as possible so your retirement fund is in good shape when it's needed.

Call 0800 304 7288 for a friendly chat about your pension

The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article. For our latest information and news, please see our articles section:

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