Even if retirement feels like something you won’t have to worry about for a long time, careful planning now means the fun won’t stop when you clock off for the last time
When someone finishes their working life, it’s not uncommon for the speechmaker at the retirement do to say something like, “We wish you a long and happy retirement!” before glasses are raised in their honour.
It’s a lovely sentiment, to be sure. After all, when you’ve worked hard for decades, you want to be able to spend many years enjoying not having to go to work. As the average life expectancy increases for most of us, the guarantee of a long retirement is more certain. But the guarantee of a happy retirement with plenty of cash to keep enjoying life requires a bit more forward-planning.
Ditch the debt
One of the best ways to retire without looming financial headaches is to get rid of debt before you stop working. Depending on your debt levels and the type of debt, this can be easier said than done, but there are steps you can take to clear this particular deck.
Focusing on paying off the debts that cost more in interest is a good way to free up your finances. You can take a tax-free cash sum from your pension savings and use it to pay off debts before retirement, although it’s important to bear in mind that you can usually only take up to 25% tax-free and it will reduce the amount of retirement income you’ll receive.
There is also a limit on tax-free lump sums called the lump sum allowance. This is normally £268,275 in total, however it could be higher if you have protection from the lifetime allowance.
Getting serious about paying off a credit card debt and then committing to not relying on credit cards is another way to enjoy a more financially secure retirement. If you feel like you’re drowning in credit card debt, it may be worth seeking the advice of a financial counsellor to work out a manageable plan to get off the credit card debt treadmill. Citizens Advice is a good place to start for free advice on debt management.
A mortgage is the biggest debt many of us will ever have, so it’s definitely one that you don’t want overshadowing your retirement if you can at all help it. If you’re in a position to whittle down the mortgage with a few overpayments, that is worth looking into, although you should check out any fees that overpayment or paying off a mortgage early might incur.
Alternatively, if you are in a position to sell your property and make enough money to pay off the mortgage and buy something cheaper as a cash buyer, that’s worth investigating. Especially as more of us are able to work remotely now, it could be a golden opportunity to live in a cheaper but possibly more idyllic location. Not everyone has to wait for retirement for a more relaxed lifestyle or, if your nest is empty, to downsize to something that’s more manageable.
Keep topping up the pension
When times are tough, especially as the cost-of-living crisis is affecting everything from petrol to pet food, it can be tempting to stop paying into your pension. However, this is a temptation best avoided. Once you’ve broken the habit of making regular payments into your pension, it can be hard to pick it up again. It’s easy to tell yourself you’ll start paying into the pot again next month or you’ll reactivate that direct debit next payday or when things get a bit better…
Investment in your future is important. You’ll have plenty of time in retirement to regret not paying into your pension fund regularly, so if you need to make cutbacks at the moment, it’s worth looking at other things you spend money on that could be better diverted into the pension.
The future is... the kids' future
“You can’t take it with you when you’re gone!” is an easy way to justify the purchase of a sports car or an expensive watch. But there are less materialistic but equally rewarding ways to use any spare capital you might have!
Do you need to sit on this money, or could you use it to help your adult kids, or perhaps a niece, nephew, or godchild that you adore? Can you invest some of this capital into their futures? If you can spare some cash for things such as education, a gap year trip, or help with a property deposit, you’ll reap the rewards of being able to enjoy their happiness with them.
A bit on the side
If you’re genuinely worried about a tight retirement, are there any ways you can make extra money to supplement your pension? Not many people want to work 40-hour weeks after they’ve retired, but it can be worth looking into less stressful ways to earn a bit more money.
Bear in mind that if you take on new work after you retire, it is still taxable and this can affect any means-tested benefits you might be entitled to. So make sure getting all the information you need to check if working after retirement is worthwhile. And make sure you’re receiving all the state benefits you’re entitled to. This is one good reason why we pay our taxes!
Passive forms of income, such as renting out a spare room or property, or renting out useful items you own, can also help supplement your retirement funds with minimal effort. And if there’s something you love to make, you might be able to make some extra cash doing something you enjoy, so it won’t feel like work. Etsy stores, for example, have proven to be a nice little earner for plenty of retired people.
If you do decide to look at some extra retirement income, always check if there are any tax implications. The last thing anyone needs is additional HMRC headaches when you should be enjoying life.
Release the equity locked up in your home
There have been plenty of advertisements on TV and radio extolling the virtues of releasing equity from your home. The good news is that there are plenty of safeguards in place to protect people who release equity from their home to use as a lump sum to fund retirement plans or other purposes, such as paying for healthcare needs.
If you decide to take this path, make sure your equity release provider is a member of the Equity Release Council, so certain standards are met, such as the right to remain in your home for life or until you move into permanent residential care and no negative equity.
It’s also important to bear in mind that equity release will reduce the sum of money you could leave in your will, and it can attract higher interest rates than conventional mortgages. Releasing equity from your home is a big decision, so make sure you get advice from a specialist adviser.
Do your sums
It can be confusing to try and work out how much you’ll need to ensure your retirement isn’t spent constantly worrying about whether you will have enough money to pay the bills and generally have a comfortable life.
If you’re unsure, check out our Retirement Health Check Calculator to work out where you need to be, where you are now and what you need to do to make sure you’re a well-funded retiree. It’s anonymous, free to use and there are no obligations.
