It should go without saying that you need to fully understand your current provision before you make any decisions. If you need to, get a professional financial planner to do this with you, but you can do it on your own, no problem.
State Pension
Firstly, check your State Pension provision – link in the notes to the gov.uk website to do that. And next, dig out the most recent statement on any DB pension schemes you have. You may be a current member or you may have been member in the past but subsequently left that employment and that scheme.
This makes you a deferred member of that scheme. You should get annual statements of benefits from each scheme you’re in. If you’re not getting those, then you need to get in touch with each scheme and make sure they have your current address.
Think back to every employer you’ve worked for – were you in the pensions scheme? If so, do you have the most recent statement? If not, then get on it. Find out when the pension will pay out, what the lump sum options are and how the pension will grow while it’s deferred and once in payment. Also ask about dependents’ benefits.
DC Schemes
If you’re paying into a DC pension then you should also have a statement each year saying what’s in the pension fund and how it’s invested. You also need to find out from your DC providers what your options are with them when you come to take benefits from your pensions.
Collate this information so you have a picture of your personal pension provision. I did a whole session this called Positioning the Pieces back in Season 16, which you might find helpful. You can access it here.
Establish Your Cashflow Needs
You’re going to need to know how much you are going to spend in retirement. If that is more than ten years away, then it’s going to be difficult to say, most likely. But if you’re within spitting distance of retiring then it’ll likely be easier. Remember to factor in three types of expenditure:
Basic: These are your minimum costs to run a house, make sure there’s food in the fridge and get about, so it’s food, utilities, insurance and running a car. Not Netflix, not Sky, not your gym or golf club membership, just the basics.
Leisure/Luxury: Now you can overlay the niceties of life, the things that you’re looking forward to doing more of in future. These are the costs that make life worth getting out of bed for!
Milestones: These are one-off or irregular costs, perhaps like taking a big holiday with the whole family once you retire, or changing the car every few years, or paying for a daughter’s wedding or whatever.
Try to factor these in and get a picture of what the first five years of retirement will look like. What are you going to need, or want, to spend?
Match Cashflow to Expenditure Needs
Once you know what your pension provision looks like and what your costs are likely to look like in the first few years of retirement, you can marry the two together somewhat and think about how you might match them up. Obviously, if you’re retiring at 60 and your state pension doesn’t kick in until 67, then you can forget that for a while.
If you’re retiring at 60 and your DB scheme kicks in at 65, then you’ll need to weigh up the option of taking it earlier at a reduced rate to provide some cashflow now. That decision will be impacted by the size of your DC scheme and its likelihood of lasting long enough to meet your needs throughout life.
This is difficult to do, for sure, but essential at least to have a go at. This is the sort of thing I’ll be covering in the Retirement Planning phase of Meaningful Academy using the incredible Voyant Go app to do the heavy lifting.
I would approach this in this order:
Know your state pension first and when that’ll kick in. That’s fairly immovable, at least you can’t bring it forward, so it’s easy to slot into the timeline. Then look at your DB schemes and start with them in their default places, kicking in at their normal retirement age.
If you have any other sources of income such as rental income or whatever, you need to factor that in too, of course. Then look at each year after you retire and determine the cashflow coming in, the expenses going out, and the shortfall between the two.
Your DC pensions AND any other money you have in bank deposits, premium Bonds, ISAs or whatever have to make up that shortfall. I’ve put together an example timeline in a downloadable format so you can see how my mind works and see if you can create something similar of your own to plan out at least the first few years of your retirement.
Finally on this, don’t completely discount the idea of having an annuity to secure the basic expenditure at least. Knowing that your minimum needs are met for life is quite something for peace of mind, and takes the pressure off the rest of your investments to make up any shortfalls in cashflow needs. A lot depends though, on what an annuity might cost you and whether you think it’s worth it.
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