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Retirement is an exciting time. As the culmination of all your hard work and planning grows nearer, you’ll no doubt have begun to plan how you intend to spend your free time – travelling, relaxing in the garden, taking up a hobby?
But the time to relax hasn’t arrived yet. As your retirement date approaches, there’s still plenty to think about.
You need to ensure you understand Pension Freedoms and what they mean for your retirement options. You also need to make sure that you have a handle on the money you intend to leave your loved ones, and that your retirement budget is up to the task – whatever later life throws at you.
Whether you’re looking for help understanding flexible retirement, trying to get a grip on your Inheritance Tax (IHT) planning, or have concerns about funding the cost of your own later-life care, we’re here to help.
Read your guide to the five things you should be considering at retirement.
Since Pension Freedoms arrived in 2015 you’ve had greater flexibility in how you take your retirement benefits.
Added flexibility brings greater responsibility too. When making your decision you’ll need to think about any other potential income you’ll have in retirement, and how long your income will need to last.
We’re all living longer and that means our retirement income needs to stretch further.
Your retirement income should ideally outlive you, without leaving too much. This ensures you can maintain your desired standard of living throughout retirement, without leaving loved ones a large Inheritance Tax (IHT) bill when you’re no longer around.
According to the latest figures, those retiring at 65 might need their pension fund to last another 25 years.
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1) Your retirement options
How long will your retirement last? (number of years based on retirement at age 65)
Source: ONS
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You should have a rough idea of the size of your pension fund, but if you haven’t reviewed your pension pot recently, speak to your provider and ask for a statement.
How large a pension fund you need to live your desired lifestyle in retirement is dependent on many factors:
• What you plan to do in retirement
• What other sources of income you have
• How much you want to leave behind to loved ones
Take a close look at your cashflow, comparing your incomings and outgoings now, to what you expect them to be in retirement. This will help you decide whether you have enough, or if there’s a potential shortfall.
Whether this shortfall is made up from savings, investments, or other income, now’s the time to get a firm grasp on the amount of money you’ll have to live on in retirement.
Is your pension fund large enough? Your retirement options
An annuity
When it’s time to decide what to do with your pension pot, your main retirement options are:
An annuity pays a regular income for life. You will usually be entitled to up to 25% tax-free cash as a one-off ‘Pension Commencement Lump Sum’. The remaining 75% of your pension pot will be used to ‘buy’ a pension, taxed as income.
If you choose not to take a lump sum, you can use 100% of your pot to buy an annuity, providing you with a higher level of income.
There are different types of annuity. Some will pay a guaranteed amount for a pre-set period, even if you die during that time. Others might provide a spouse’s pension for life in the event of your death. You might opt for a fixed annuity, or one that increases by a certain percentage each year to combat inflation.
Once you select a pension basis and are receiving an annuity, it’s unlikely that you’ll be able to make any changes to it.
An annuity is inflexible, but it does give you the peace of mind of a regular, known amount, which makes budgeting simpler.
A lump sum
An Uncrystallised Fund Pension Lump Sum (UFPLS) is a lump sum payment, 25% of which is tax-free, with the rest taxed at your marginal rate.
If you plan to go travelling or have committed to helping a child onto the property ladder, receiving a large sum in one go might seem appealing. But remember that you have the responsibility for budgeting during the rest of your retirement.
If you take a lump sum, you’ll need to keep track of your expenditure to ensure your money lasts.
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Flexi-access Drawdown involves taking a lump sum from your pension pot whilst leaving the rest invested. You can then take income payments from it flexibly, varying both the regularity and the amounts.
Again, this flexibility brings extra responsibility. You’ll need to keep track of your remaining pension pot each time you draw down income and be sure you’re leaving enough to live on.
Flexi-access Drawdown
If one size doesn’t fit all, you can also take a mixture of some of the above options.
A mixture of the above
If you plan to have other sources of income during your retirement you might opt not to take your pension funds at all.
Later in this guide – in the section concerning Inheritance Tax (IHT) and estate planning – we’ll look at the potential benefits of leaving your pension pot untouched.
Don’t take your pension at all
Seek advice
Speak to your AKFP planner if you’d like to discuss any element of the pension options available to you.
Get in touch at: [email protected] or call 028 9260 3175.
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As you settle into your retirement, it’s important to enjoy the returns of all your hard work and planning, doing the things you’ve been looking forward to, whatever they might be.
But it’s also important to expect the unexpected and to have a plan in place for when the unforeseen happens.
That’s where an LPA comes in.
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• A Health and Welfare LPA covers things like daily routine, medical treatment and moving into care
• A Property and Financial Affairs LPA allows your chosen attorney to manage your finances, pay bills and collect benefits on your behalf
2) Do you have a Lasting Power of Attorney (LPA) in place?
What is an LPA?
An LPA is a legal document that allows you to choose the person who will manage your affairs if you’re no longer able. If you are incapacitated, whether through accident or illness, a person you trust will look after your finances and welfare. This can either be temporary or, if needed, for the rest of your life.
It might not be a topic we’re keen to dwell on but having an LPA in place can give you and your loved ones real peace of mind as you head into retirement.
There are two main types:
If you’re a business owner, you might also consider a third type of LPA:
• A Business LPA – this can allow you to appoint a colleague or partner with specialist knowledge of your business to look after specific elements of how it is run.
Why should I put one in place?
With an LPA in place, if you become incapacitated through accident or illness, your appointed attorney will be able to take immediate control of your finances and welfare. This ensures your wishes are carried out and that your loved ones are not left in financial limbo.
Without an LPA in place, your loved ones will have to apply to the Court of Protection to appoint a deputy. This is a time-consuming process. It can take up to three months from the date the application is sent to the court but there may be delays getting to this point, for example, if medical tests are required.
Your loved ones might find themselves in financial difficulties for the months when the application is in progress.
Speedy decisions
You can only appoint an attorney whilst you have the mental capacity to do so, meaning that you have full control and can choose someone you trust. And you don’t need to limit yourself to just one attorney.
You can nominate multiple people to cover different areas. You can also restrict the sort of decisions your attorney can make and choose successors to protect your interests if your appointed attorney dies.
Pick someone you trust, but also think about any expertise your attorney might need.
For personal financial matters or your own care, you might choose a family member. If you own a business, though, you might appoint a colleague or business partner specifically to look after your business interests or choose a Business LPA.
You’re in control
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An LPA can be temporary, to cover hospitalisation after an accident, or longer-term, for conditions such as dementia. It only becomes legally binding once it is registered at the Office of the Public Guardian.
A Health and Welfare LPA is triggered only when you become unable to make decisions yourself. You can register a Property and Finance LPA to come into force whenever you choose but be aware that the registration process can take up to three months.
A temporary LPA can be altered or removed as long as you can demonstrate full mental capacity.
You’re covered for all eventualities
Once registered, an LPA can remain in place for your lifetime, giving you peace of mind that your affairs and wellbeing will be looked after if you are no longer able.
And because you have chosen your attorney, you know you can trust them to act in your best interests.
It gives you peace of mind
Seek advice
Speak to your AKFP planner if you’d like to discuss the process of putting an LPA in place.
Get in touch at: [email protected] or call 028 9260 3175.
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Annual Exemption
You can gift up to £3,000 a year tax-free. The exemption can also be carried forward for one year.
The Annual Exemption applies per individual so couples can gift £6,000 a year, or £12,000 if neither of you used your Annual Exemption last year.
Exempted gifts
Small gifts of up to £250 are usually exempt and can include birthday or Christmas presents.
Gifts to your spouse, during your lifetime, are also exempt (as long as they live permanently in the UK).
Balancing a comfortable retirement with the desire to leave money to loved ones once you’re gone can be tricky.
Knowing how much you intend to leave behind, managing your estate to make that a reality, and ensuring you don’t leave a large IHT bill, can be a complicated process.
There are things you can do now, and throughout your retirement, to limit the impact of IHT on your loved ones.
One of the ways to manage your IHT liability is through gifting, lowering the value of your estate for IHT calculation purposes.
3) Inheritance Tax (IHT) and estate planning
Types of gift
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Normal expenditure out of income
You can also make exempted gifts using normal expenditure out of income exemption.
For this exemption to apply to a gift you make, it must be shown that:
• The gifted amount forms part of your normal expenditure
• The gift was made out of income
• You were able to make the gift and still be left with enough income to maintain your normal standard of living.
Making use of these gifting rules might allow you to limit your liability for IHT tax, preventing you from leaving your loved ones with a large bill when you are no longer around.
A will allows you to state what you want to happen to your estate when you die, and yet over half of UK adults don’t have a will in place.
If you want to leave an inheritance to your loved ones, writing – or revisiting – your will should be a priority.
Dying without a will (or ‘intestate’), means that you and your loved ones have no say over what
will happen to your estate. Your assets are distributed according to the rules of intestacy and these might not tally with your wishes.
Be sure to write or review your will to make sure it is in line with your wishes.
Speak to us if you are unsure about any aspect of putting a will in place.
Put a will in place
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A trust is a legal arrangement whereby assets are held by a trustee, on behalf of a beneficiary.
If you have a life insurance policy, consider placing this in trust. HM Revenue and Customs (HMRC) figures for the 2016/17 tax year confirm that more than £300 million was paid in Inheritance Tax on the proceeds of life insurance policies. And yet, contacting your insurance provider and asking to complete a simple trust form, would allow the policy you hold to pass into a trust on your death.
Trusts typically fall outside out of your estate for IHT calculation purposes.
Consider placing any life insurance policies you hold in trust upon your death and you may save your loved ones from facing a large IHT bill.
Trusts
Pension legislation around how you can pass pension benefits to the next generation changed in 2015. If you have other income or investments that you plan to use in retirement, consider whether you need to draw from your pension pot at all.
If you die before the age of 75 and have not yet taken benefits, your unused pension pot remains outside of your estate for Inheritance Tax (IHT) calculation purposes. This means you can pass 100% of it on to a beneficiary you choose.
What’s more, if your chosen beneficiary keeps the inherited amount in a pension environment, it won’t form part of their estate either.
Choosing a beneficiary is done through your provider rather than via your will.
If you die after age 75, your beneficiary will pay tax on the amount they receive, at their marginal rate. The rules are also different once you’ve taken money from your pension.
If you can afford not to take your pension, consider passing it on to your spouse or children.
Your pension
Seek advice
IHT and estate planning can be complicated. If you want to discuss any aspect of your estate planning, speak to your AKFP planner.
Get in touch at: [email protected] or call 028 9260 3175.
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When planning for your retirement – listing the exotic places you’re going to visit or the money you plan to leave to your children – dwelling on the potential cost of your later-life care might not be top of your list of priorities.
And yet it’s a crucial part of your financial planning.
4) Consider the cost of later-life care
Why factor in the cost of care?
We’re living longer. The government confirmed in 2017 that the care home sector currently housed 410,000 residents and that the average cost for someone in self-funded care in 2016 was £846 per week (nearly £44,000 per year).
Knowing where this money will come from – if needed – has several benefits:
Having a plan in place will give you and your family peace of mind. You can be sure that whatever later life care you might need is financially covered and budgeted for. Being confident in your plan for the future can help you to enjoy the present.
Peace of mind
Many different care options are available and the one you choose might be determined by your health in later life, and the nature of any needs you have.
But thinking about the options available early will give an idea of the types and costs of different types of care.
Ensure you get the type of care you want
Later-life care expenses might include the cost of:
• Remaining in your own home but adapting it to meet your changing needs
• Paying for the cost of care visits whilst remaining in your own home
• A move to assisted living or sheltered accommodation, giving you a level of independence with care on hand should you need it
• Paying for residential care if you are no longer able to live independently
Your retirement plan should take into account all of your potential future incomings and outgoings.
Knowing the amount of pension income you might receive, and the saving and investment amounts you have, is important. So, too, is having a grasp on your outgoings – travel expenses, home improvements, money put aside for inheritance.
Factoring in the cost of later life care will help to further round your cash flow plan, making budgeting at retirement easier.
Knowing how far your pension income will stretch
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3 ways to fund your later life care
There are many ways you might fund your later life care, depending on the type of care you need and the amount you have available to self-fund.
Be sure to also consider what will happen to the money you’ve put aside for later life if care is not needed.
Part 3 of this guide, ‘IHT and estate planning’, should help ensure that any unused amount goes where you want it to.
In the meantime, here are a few ways you might fund your later-life care:
1. Care fee payment plan
Also known as an immediate care plan, or an immediate needs annuity, a care fee payment plan can give you a guaranteed, regular income.
You might consider a care fee payment plan if you have the money available to invest and the need for care is imminent.
The invested amount is used to buy a regular income for life. Once the annuity is in payment it cannot be changed or cancelled, nor can any ‘unused’ money be claimed back. A care fee plan might not be the best option if you only need the care temporarily or if you want any of your invested money back in the future.
Remember to shop around. Check the UK Care Guide or speak to your AKFP planner.
2. Equity release to fund home care
If you are looking to fund care at home, you might opt for equity release.
If you have equity in your home, you can ‘release’ it, unlocking tied-up cash and having it paid to you, often as a lump sum. You can then use the cash for any purpose you choose – in this case, to pay for the care you need.
There are two main equity release options:
• Lifetime mortgage – Equity release is a mortgage secured on your property. You take a loan, receive a lump sum or regular payments, but you don’t make any repayments.
Accumulated interest is added to your mortgage debt and the full amount is taken from your estate when you die or enter long-term care.
• Home reversion – You sell all or part of your property at low market value. You continue to live in your home – and can receive care there – but you no longer have sole ownership of it.
The scheme provider will take back their share of your property when it is sold, with the remaining percentage going to your estate.
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3. Using assets
You might have assets you can allocate to self-funding your later life care.
Whether that’s savings, dividends, or investments, ensure you have enough to cover the cost of whatever later life throws at you and have a backup plan if your assets prove to be insufficient.
Seek advice
If you have any questions about factoring the cost of later life care into your retirement planning, speak to your AKFP planner.
Get in touch at: [email protected] or call 028 9260 3175.
028 9260 3175 [email protected]
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Speaking to a financial planner should be something you do regularly, but especially in the run-up to or following, big life events.
Seeking professional financial advice when you’re planning your retirement can be useful.
The International Longevity Centre (ILC) – an independent charity and think-tank – recently conducted a report into the benefit of receiving financial advice.
They found that those who seek advice are better off than those who don’t. They went on to quantify the value of that advice and found the following:
5) The benefits of advice
• People who received financial advice between 2001 and 2006 were on average over £47,000 better off by 2014/16 than those who didn’t take advice
• Seeking advice more than once is even more beneficial, with pension pots on average nearly 50% higher for those regularly seeking advice compared to those who took one-off advice at the start
Seeking advice has a genuine, and calculatable, impact on your assets and the amount of money you can take into retirement. But the value of advice doesn’t stop there.
Moneyfacts recently reported that ‘older generations were least likely to have spoken with a professional financial adviser, with over half (51%) of over-65s never taking any financial advice.’
The ILC report is clear: financial advice matters and can make a difference.
Seek advice
If you’d like to discuss any aspect of your retirement, please speak to your AKFP planner.
Get in touch at: [email protected] or call 028 9260 3175.
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If you’d like to discuss any aspect of your retirement or estate planning, then we can help. Please get in touch.
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Aiken Kennedy Financial Planning is the trading name of AKFP Ltd which is authorised and regulated by the Financial Conduct Authority. Financial Services Register No: 176477. Registered Address: Building 2, The Sidings, Antrim Road, Lisburn, BT28 3AJ. Registered in Northern Ireland, No. NI29631.
You’ve made it to retirement and your hard work and planning are about to pay off.
Before you fully relax though, take the time to think over the five things you can do now to make your retirement that much more relaxing.
Choosing the retirement option that works best for you is crucial – whether that’s a regular income, a lump sum, or not taking your pension pot at all and opting to leave it for the next generation.
Revisit your financial plan. You can’t anticipate everything later life will throw at you, but you can put a plan in place now to protect yourself against the unexpected.
Whether that’s having an LPA in place – ensuring that your finances will be looked after if you become incapacitated – or factoring the cost of later-life care into your retirement planning and budgeting, actions you take now will give you and your family peace of mind.
Finally, ensuring your will is written and up to date, and that you’ve protected your loved ones – as much as possible – from the possibility of a large IHT bill when you’re no longer around should allow you to relax and enjoy your retirement in the present, knowing that the future, whatever it brings, has been planned for.
What to do next
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