The five-step plan to a better retirement A step by step guide to organising your finances
This is one of the biggest financial decisions you ll make so it s important to get it right. At Fidelity we strongly recommend you also seek expert help. If you already have a financial adviser they can help you plan your retirement. Fidelity Personal Investing does not give advice, but Fidelity s Retirement Service has a team of specialists who can provide you with free guidance to help you with your decisions. They can also provide advice and help you select products though this will have a charge which will be agreed with you in advance. Call us on 0800 084 5045 or visit fidelity.co.uk/retirement for full details of services and the fees. Of course you are free to use your own adviser. Our experts can: help you understand the different options available explain how these can be combined to meet your needs recommend the products most suitable for you Guidance from the government: Pension Wise The government offers a free and impartial guidance service to help you understand your options at retirement. This is available via the web, telephone or face to face through government approved organisations, such as The Pensions Advisory Service and the Citizens Advice Bureau. You can find out more by calling 0800 138 3944 or by going to pensionwise.gov.uk. 2
The five-step plan to a better retirement There has never been a better time to retire. New rules have given people more flexibility when they retire and the freedom to spend their pension savings as they wish. This means we no longer have to settle for a one-size-fits-all approach when it comes to our retirement finances. Instead, we can choose to use our own pension in a way that suits our circumstances. But in order to make the most of these new freedoms we need to understand the different options available. If this seems a little daunting, don t worry. At Fidelity, we are here to help every step of the way. This guide explains the key issues you need to consider in simple, jargon-free language. Remember the worst thing you can do is simply sleep walk into retirement without making any active decisions about your finances. We ve set out an easy-to-use five-step plan to help you make the most of your retirement savings. So what are the five steps? Step 1 Step 2 Know what you need Understand what you ll have You can t plan effectively if you don t know how much income you ll need in retirement. Retirement income is about more than just your pension. How much money will you have in retirement? Step 3 Bridge the gap What to do if you don t think you ve saved enough. Step 4 Step 5 Understand your pension options Make some decisions Pensions are now far more flexible. What can you do with yours? This is one of the biggest financial decisions of your life so it s important to get it right. Important note: This document is provided for information only and does not constitute advice. If you are not comfortable making these key decisions you should consider obtaining financial advice. 3
Step 1: Know what you need You can t plan your retirement finances effectively if you don t know how much money you re likely to need once you stop working. You need to draw up a simple, but accurate household budget, of what you and your partner are likely to spend. When planning a retirement budget think about your different spending needs. Start with the essentials. Work out what you spend on day-to-day expenses, be it housing, food bills, petrol, heating costs etc. Think about how these spending patterns will change in retirement: for example you may no longer have a mortgage to pay but if you are at home for longer during the day heating bills could rise. Other key costs. Not all spending is on a monthly or even annual basis. Think about what you spend on insurance, car maintenance, home improvements, replacing washing machines etc. These can be hefty bills, but may need paying urgently in emergencies. Many people overlook these irregular costs when drawing up a budget and as a result seriously underestimate their spending. This could mean your pension savings run out earlier than expected. Discretionary spending. Think about the lifestyle you d like to have in retirement. How much do you envisage spending on holidays, hobbies, entertaining, birthdays and so on? It s easy to underestimate how long we need our pension savings to last With life expectancy at older ages the highest it s ever been*, many people may enjoy longer retirements than ever before. But our spending needs are likely to alter as we age. Most people have three distinct phases to their retirement: The active period. This is the period immediately after retirement. People are generally in good health, so expenditure is typically higher, particularly if you aim to make the most of your new found free time. The transitional phase. At some point most people begin to slow down a little, often as a result of poorer health. Therefore the amount of income people need often falls too. The later years. During the last years of their retirement many people need additional care and support. In many cases people are expected to make a significant contribution towards these care costs so expenditure can rise again. Many people opt to take a higher income in the early years and allow for a lower income later on. But it s important to remember to build a degree of flexibility into these budgets: we don t know how long we will live for, nor how long our active retirement will last. * Public Health England, February 2016. 4
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Step 2: Understand what you ll have Retirement income is about more than just your pension. You may also have income from earnings, state benefits, savings and investments as well as the equity locked up in your home. When calculating how much you ll have, don t forget to factor in any earnings. According to the Office of National Statistics one million people aged 65 or over are still in the workplace. Remember, even if you switch to working fewer hours you can keep more of your pay, as there is no National Insurance to pay on earnings once you reach your State Pension Age. Below is further information to help you calculate what you will receive in retirement: The State Pension. This may be the bedrock of most people s retirement, but few of us have any idea what we will get as a state pension. Much will depend on the National Insurance contributions made during your working life and whether you contracted into the State Second Pension (S2P) formerly known as the State Earnings Related Pension Scheme (or SERPS). To get an up-to-date pension forecast visit the Department of Work & Pension s website, gov.uk/state-pensionstatement. If it s lower than expected investigate whether making additional NI payments will boost this pension. REMEMBER you don t have to take your state pension at this age. You can defer taking it and may get a bigger pension in return. Many people are similarly confused as to when they will retire, as the State Pension Age is rising. and by 2020 no-one will be able to claim a pension before their 66th birthday. Use the same website gov.uk/state-pension-statement to find out exactly when you will get your state pension. Private and Company Pensions. For most people their pension is the most valuable asset they own, after their home. However, most of us don t have one pension, we have a whole raft of different plans. As you approach retirement it s important to review these to see what they are now worth, what income they will pay in retirement and whether you want to put all your pensions into one pot. This may make your retirement savings easier to manage and mean you could pay lower fees. You should make sure that you don t give up valuable guarantees or bonuses especially in older pension plans. Please go to fidelity.co.uk/transfers for more information. 6
What type of pension do you have? Some company pensions known as defined benefit or final salary schemes will pay an income that s directly linked to your earnings, rather than being dependent on the vagaries of the stock market. In most cases this pension income will rise each year in line with inflation, and will also pay a spouse s pension, should you die first. Even if you have only been a member of one of these pensions for a few years they can still be extremely valuable. For this reason you should be cautious about cashing in these pensions or transferring them into a newer scheme. All private (or personal) pensions and most current company pensions are now money purchase schemes. Here your contribution, and any employer s contribution, goes into a retirement fund, which is invested in a range of assets. A pension statement will show what your fund is currently worth and should also give an estimate of the annual income you would get if you used this fund to buy an annuity. As you near retirement you may want to review how these pensions are invested. If you plan to cash in this fund, or buy an annuity you may want to ensure these savings are in lower risk investments (such as bonds and cash). This should help protect your retirement fund from sudden movements in the stockmarket. Tracking down lost pensions People and their pensions can easily become separated, but there are organisations that can help track down these savings plans. The Pension Tracing Service (0345 6002 537) tracks down lost company pensions, while The Unclaimed Assets Register (0844 481 8180) will help people trace private pensions and other investments. Other savings and investments Other savings can be used to supplement your pension income. These include simple savings accounts, as well as tax-efficient ISAs (Individual Savings Accounts). When reviewing your savings consider the following points: Risk. How much risk are you prepared to take with your money? Your capital is safe if you keep it in a bank or building society account, but interest rates are low, so it will grow at a far slower rate and may not keep pace with inflation. Over the longer term this means the value of your savings could fall in real terms. Access. Do you need to take a monthly income from your savings, or will you simply dip into the capital as and when you need it? This will influence where you invest these savings. For example, money that s kept in a savings account can usually be accessed quickly in an emergency. This isn t the case for money tied up in property. Some investments are set up to pay either a monthly, quarterly or twice-yearly income. Tax. How are your savings and investments taxed? Make use of tax-friendly vehicles, like ISAs, where typically there is no further tax to pay on income from these plans. You can choose to invest in cash or stocks and shares or both. Amount. Are you going to simply spend the interest (or dividend income) earned on these savings or will you spend part of the capital as well? If so, you need to gauge how much you will take, and how long your savings are likely to last. Fidelity has a range of investment solutions that can be used to work alongside pension savings. Find out more at fidelity.co.uk 7
Property Many retired people are asset rich but income poor. This usually means they have a valuable home, with no mortgage on it, but not enough pension and savings income to maintain the lifestyle they d like. The question is how to access the equity that is tied up in their home. There are a number of options: Downsizing. This is usually the most cost-effective option. By moving somewhere smaller and cheaper you can effectively cash in part of the value of your home. This can also mean cheaper heating and council tax bills in future. However some people find they need to move a considerable distance or move to a significantly smaller home to realise gains, particularly once moving costs have been factored in. This may not always be practical. Equity Release. In most cases you take out a mortgage on your home, which will be repaid when the house is sold usually after you die or move into a care home. There are no monthly repayments on this mortgage, but interest is added to the debt. If you live a further 20 years this means the amount owed will far outweigh the cash originally released, and this will have a significant impact on the inheritance you leave. All regulated equity release plans have a guarantee ensuring that the loan will never exceed the value of your home. In some cases, rather than a mortgage, you can sell part of your home to an equity release company, but retain the right to continue living there. Those considering either option should seek both legal and financial advice as these are complex products. Other benefits There are a range of additional benefits that retired people may be able to claim to boost their income. Personal Independence Payments. Payable to those aged below 65 who are disabled and need additional help. Attendance Allowance. This is available to those over 65 who need help with personal care as a result of an illness or disability. Health Benefits. Those aged over 60 get free prescriptions and free eye tests. Winter Fuel Payment. A yearly tax-free payment to help those of State Pension Age pay for their heating. Free travel. Many pensioners qualify for concessions or free travel on public transport. Exact savings will depend on where you live. Senior Railcard. A Senior Railcard provides significant savings on rail travel. Council Tax Support. If your retirement income is relatively low you may qualify for a reduction in council tax. Housing Benefit. You could qualify for help with the rent if you re a tenant. Rental Income. You may also be able to generate a tax-free rental income by using the government s Rent-a- Room scheme, by either taking in a lodger, or renting out a spare room as storage space. 8
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Step 3: Bridge the gap You ve calculated how much income you ll need in retirement, and looked at what your pensions, savings and investments are worth. If the two sides of this equation don t add up, there is no need to panic. There are steps you can take to bridge this gap. Pay more into your pension fund. You can tax-efficiently invest in a pension up to the annual allowance each year. For most people this is currently 40,000. Please note your annual allowance may be reduced in two ways: Money Purchase Annual Allowance. If you have flexibly accessed to your pension benefits under the flexible rules, your annual allowance may have reduced from 40,000 to 10,000. If you are subject to the MPAA you cannot carry forward any unused allowances from previous years. A reduced annual allowance for high earners. From the 2016/17 tax year, this is being reduced for high earners. This change means that the annual allowance will be reduced by 1 for every 2 of earnings over 150,000. The reduction stops at 210,000 so everyone will retain an allowance of at least 10,000 and you are still able to carry forward any unused allowance. If you can afford it increase the contributions. You don t have to pay this money from your earnings. You can use a redundancy payment, other savings, a bonus or even an inheritance. REMEMBER: With effect from 6 April 2016, there is a lifetime allowance of 1m. If your total pension funds exceed this, you will pay an additional tax charge. Pay voluntary National Insurance contributions. You may be able to boost your entitlement to the new State Pension by paying voluntary contributions. This option is not available to everyone and it's important that you check that it's right for you before you make any extra payments. You can find out how much you've contributed so far, and find any gaps, by checking your National Insurance record at www.gov.uk/check-national-insurance-record Pay off debt. Where possible look to clear large outstanding debts such as a mortgage, credit cards or personal loans before you retire. It may be possible to use a tax-free lump sum from a pension to do this. However, check in advance there aren t any penalties for clearing this debt early. Work for longer. Many people accept they will have to work beyond their State Pension Age. Many switch to a less demanding role, or work part-time hours. This additional income can supplement living expenses, allow you to delay your State Pension (so you then get a larger pension paid) or allow you to further boost your pension savings. Even if you are a non-taxpayer, you can claim full basic rate tax relief on your personal contributions, up to 3,600 per tax year.this means you can make a maximum contribution of 2,880, to which the taxman adds 720. 11
Step 4: Understand your pension options Pension rules allow people to access their pension savings in a more flexible way from age 55. There are three basic options: Take cash from your pension. You can take part or all of your pension as a cash lump sum. Some of this will be tax-free but some will be taxed. Take flexible income using pension drawdown. Your pension fund remains invested and you can draw an income from it. You can take as much or as little as you need when you need it. Take guaranteed income using a lifetime annuity. A lifetime annuity is an insurance product that pays a fixed income for life. The income you get depends on your age and health. REMEMBER: You don t have to put all your eggs in one basket. It s possible to take a mix-and-match approach. You may take some cash, use part of your fund to secure a guaranteed income, but leave the rest invested, giving you flexibility and the chance to grow these savings in retirement, but this is not guaranteed. Taking cash from your pension Previously, most people could take part of their pension as a tax-free lump sum and the rest had to be used to provide a lifetime income. You can still do this but you also have the option of taking more, or even all of it, as cash. It sounds attractive but does it make sense to do so? Here are some points you should bear in mind: How much tax will you pay? You can usually take up to 25% of your pension as a taxfree lump sum. If you take more than this it will be taxed as income in the tax year in which it is taken. Not only will this mean you pay tax but it could push you into a higher rate tax bracket meaning you pay even more tax. If you can, it may be worth considering spreading your withdrawals over several years to ensure you avoid this. What are you going to live on in retirement? Taking cash from your pension savings now means there will be less in your pension pot to provide an income in the future. You will not only miss out due to the cash you have taken but also any investment growth that you might have earned on those savings. What will you do with it? You may want to get the cash to pay off debt which may make sense particularly if you are paying high rates of interest. If however, you plan to take cash to put into a savings account you may find, with low interest rates, that this fails to keep up with inflation. You can choose to invest your cash using, for example, an ISA. If you want to invest, you may want to consider staying invested in your pension plan. If you want to take an income from your pension savings then you can do this using pension drawdown, buying an annuity or both. To help you decide which will suit you best, we ve outlined the key advantages and disadvantages of each option on page 13. 12
Pension drawdown Drawdown allows you to take an income while leaving your pension savings invested. To decide if drawdown could be right for you, take a look at some of the advantages and disadvantages: ADVANTAGES You have more control over your savings, and can choose how they are invested, and how much income you take from them. Funds are typically invested in a range of assets, including equities. This could deliver higher return over the longer term, so your pension has a better chance of keeping pace with inflation. This is not guaranteed though and will involve some investment risk. You can make changes to the income you receive, increasing it should you need more or decreasing it should you need less. You have the opportunity to leave surplus pension funds to a spouse or children. This will be subject to a tax charge (*see below). DISADVANTAGES Investment returns can be volatile, so the value of your pension fund can fall. This can mean you have to reduce the income you take, or risk running out of savings sooner than expected. Even if investment returns are good there is a risk you could outlive your pension funds. You need to regularly review your investments to ensure the income you are taking is sustainable. If you plan to buy an annuity later in life, rates could have fallen in the interim. Annuities Here are some of the advantages and disadvantages of annuities: ADVANTAGES This is the only option that guarantees a fixed income for life. You cannot outlive your pension fund, however long you live. Joint-life annuities will pay a widow, or widower s pension. Higher incomes are paid to smokers, those with medical conditions or anyone who leads a more unhealthy lifestyle. DISADVANTAGES Once you buy an annuity normally you can t switch back at a later date, or transfer to another annuity product. In most cases there are no surplus pension funds to leave to family. (You can buy a product that will repay some of this fund, but usually only if you die within ten years of buying the annuity.) Most people opt for a level annuity that does not increase with inflation. This means the value of your pension is eroded by inflation. Inflation-linked annuities are available, but tend to be more expensive. Many people don t get the best annuity rate, or the most suitable annuity product because they don t shop around. * Tax on funds upon death Subject to the lifetime allowance (LTA) there may be no tax to pay if the pension holder dies before their 75th birthday. In the majority of cases where the death is later surplus funds can be left to a spouse or children. The income is taxed at their marginal rate. So a basic rate taxpayer will pay 20% on these funds. 13
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Step 5: Making a decision At Fidelity we don t believe in a one-size-fits-all approach to retirement. We know our customers have different needs, will want to retire at different times, and have different priorities when it comes to their pension savings. By following our five-step plan you should now be in a better position to decide what to do with your pension, and how to make the most of your retirement finances. The key issues you need to bear in mind are: Are your basic living expenses covered? We recommend that these are covered by a secure income such as the State Pension or defined benefit pension. You may want to use some of your pension savings to buy an annuity to cover these expenses. Beware of inflation. This can seriously erode the value of cash savings or a fixed income over the course of your retirement. Investing in shares can help your savings beat inflation, but this is a higher risk option, and the value of your savings can fall. In contrast, deflation could be an advantage for your cash savings, but a disadvantage if you are investing in shares. Think carefully about irreversible decisions. Once you ve sold your home, or bought an annuity there s no going back. Many people are retired for 20+ years. Your circumstances are likely to change over this period, so where possible, build flexibility into your retirement plans. Be tax aware. The way you take your retirement income will have an impact on how much tax you pay. By timing when, and how much, you take from your pension fund, you can reduce the total amount of tax paid on your savings. Important Information: The value of investments can fall as well as rise and you may get back less than you have invested. Tax savings and eligibility to invest in a SIPP or ISA depend on personal circumstances. All tax rules may change in the future. You cannot access the money held in a pension until minimum pension age which is currently 55, but will rise to 57 by 2028. Pension drawdown is complex and may not be right for all clients, advice will need to be obtained and charges may apply. Pension drawdown income is not secure. You and your adviser, if you have one, control and must review how your pension is invested and how much income you draw within the applicable limits. Poor investment performance and excessive income withdrawals can deplete your pension pot leaving you with less income than you require. You need to be realistic about how tolerant to risk you are and to be aware of your capacity to withstand loss of capital, should markets go down. Past performance is not a guide to what might happen in the future. This information is not investment advice and must not be used as the basis of any investment decision, nor should it be treated as a recommendation for any investment. We hope this guide has given you the confidence to make the right decisions about your retirement income. This is a complex area and many people feel more comfortable discussing their options with a retirement expert. To speak to one of Fidelity s retirement income specialists call 0800 084 5045. 15
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