Think you are ready for retirement? It is not just a case of how big your pension pot is. Make sure that you consider all elements of financial-planning, especially new expenses and costs that you might not have had to contend with when you were working, when determining your retirement date.
A Market Downturn Early on in Retirement
Market volatility in early 2016 provided a reminder that retirement-portfolio balances can decline. And encountering a downturn, especially early in retirement, can affect the viability of retirement. If your £1 million portfolio were to drop by 25% next year, your £40,000 annual withdrawal would not be as obtainable - or sustainable.
Increased Health Costs
Retirees' healthcare expenses vary widely and may change over time; and not all costs are covered by the NHS. In the event you require care in old age a care assessment is carried out by your local primary care trust which determines whether you qualify for help with care funding – called NHS nursing care contribution – or whether you can receive full funding, called NHS continuing care. To be eligible for continuing care you must be deemed to have a "primary health need".
Those not deemed eligible may be entitled to aid from a registered nurse and the NHS nursing care contribution, which is a non-means-tested weekly payment paid to a nursing home towards nursing fees. Patients will still need to pay for their accommodation, board and personal care – and these costs can mount up.
Inflation Can Erode the Power of Your Income
Minor cost increases – on petrol, food shopping, household bills – mean that you'll need to spend more to maintain a steady standard of living. That's why it's so important to make sure that you're factoring in the role of inflation when assessing the viability of your plan pension plan; an amount that you can live on today may not be enough to get by on in 10 years.
Morningstar research suggests that financial advisers and retirees in the United Kingdom should use lower initial safe withdrawal rates than in the US, the lower end of the range now starts towards 2.5% or 3% and not the previous 4%. The generous capital market returns of the prior century that bolstered a comfortable and long-lasting retirement portfolio may give 21st-century retirees a false sense of security, but this drawdown rate does factor in inflation.
It's also valuable to make sure that your portfolio includes direct inflation hedges like index-linked bonds as well as stocks which offer natural inflation protection such as utilities.
Pensioners Still Pay Tax
While you may have enjoyed tax efficient benefits when accumulating your retirement savings, you will owe income tax on your withdrawals if they are more than your annual personal allowance of £11,000. Capital Gains made outside of any ISA or pension will also be liable to tax too.
It is important you factor in the effect of taxes when crafting your retirement-spending plan, as well as the merits of tax-efficient savings vehicles. Can you draw an income from savings held outside a pension and protect your retirement pot? If so, defer withdrawing from your pension until absolutely necessary.
You might Not be Able to Continue to Work
Continuing to work at least part time is a fact of life for many of today's "retirees"; they may do so by choice or because it is the only way to make the numbers add up for their retirement. The proportion of people aged between 50 and 64 that work is higher in the UK than the averages of both the EU and the entire OECD area.
But while there are certainly several important financial advantages associated with working longer – delaying withdrawing from your pension pot for one – working longer may not be tenable for everyone. Health, redundancy or an economic downturn could prevent you from being able to work, so it is best to have a back-up plan.
