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Your finances after... retirement
As well as making sure you get the most from your pension, it's important that the rest of your finances are in good shape as you near retirement.
by Michelle McGagh on Jul 30, 2012 at 09:00
When approaching retirement most people’s financial affairs centre on their pension and what income can be produced. But there are other important areas that should not be overlooked in your financial plan.
The first big decision when retiring is how to get the most out of the pension pot you have built up over your working life. There are two options to be considered, and the first and most common way to produce an income is by buying an annuity.
An annuity is essentially an insurance contract that protects you if you live too long – you buy a monthly income with a lump sum (your pension pot). There is also income drawdown, where your money remains invested and you take a monthly income from it.
Tax-free lump sum
With both these options you are able to take 25% tax free cash if you wish.
Arthur Childs, managing director of Arch Financial Planning, an independent financial advice firm in Surrey, said it is ‘not always wise to take the maximum’, as by keeping the money in your pension you will be able to draw a larger income. Childs recommends reassessing your budget as income drops.
‘Now that the salary has ceased, or is ceasing, it is important to carry out a detailed review of income sources and likely expenditure. Remember, expenditure may increase dramatically as there is now time for three cruises a year!’
When to take your pension
Childs also said people should look at whether they need to take their pension as soon as they retire, particularly if they plan to work part time or even become self-employed.
‘In retirement there is a case for continuing to make pension contributions of up to £3,6000 gross a year [the maximum contribution that can be made by retired people] or the level of any income from part-time employment or self-employed.’
As more people need to work for longer, or continue working in retirement, Childs said it is a good idea to reassess your skills.
‘Is there an opportunity to use experience and skills learned during their working life to earn additional money during retirement from buying and selling something, giving talks or writing books and articles?’
Childs said retirees should think about transferring death benefits from unused pension pots to children rather than a spouse as they are IHT-free. Death benefits are typically paid out in a lump sum to the named beneficiary. Insurance to cover any IHT bills should also be considered.
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