After working for a few decades, there comes a time when people start thinking of moving out of the workforce. Retirement is when you decide not to work any longer. A new phase in your life opens up. Now, there are no early mornings and returning from late night shifts. Life becomes relaxed and you can devote more time to your hobbies. However, retirement is a major life decision and one that should not be done in haste. It’s so much important to plan ahead regarding your finances. You should understand that the income you’re used to will reduce and accordingly save enough before you put in your papers. Here, we cover some frequently asked questions about retirement and pension in the UK.
- When can I afford to retire?
- How long does retirement last?
- How much income would I need?
- What is a retirement budget? Does it help?
- What income will I have?
- The State Pension
- Salary-related pension
- Workplace or personal pension
- Income from other sources
When Can I Afford to Retire?
Really, this differs from person to person. In the past, people in the UK used to work until a specific age set by the State or employer. Today, things are changing. People usually work for as long as they want. The planning for retirement starts relatively early. You may either retire gradually or take up some part-time jobs rather than stopping work altogether. Whatever the case may be, it’s wise to have enough money saved up as your main income would no longer come in. Your retirement can span over one or two decades depending on how long you live.
How Long Does Retirement Last?
Retirement phase may easily last upto 30 years based on when you retire and the age at which you’ll pass away. This is a transition stage and requires you to make provisions for it. It’s seen that many underestimate how long they’ll live. As a result, they run out of money before long. If you have a secure income for the rest of your second innings years, there shouldn’t be a problem.
How Much Income Would I Need?
When you retire, your income and spending habits will change. That’s natural as the needs of senior citizens are little compared to that of young men and women. You might spend more time at home and on hobbies than before. You could cash in your pension to clear debts, travel the world or indulge in an expensive item. But, be mindful of how much you spend as the goal is to make income last till you till death.
What is a Retirement Budget? Does it help?
Like a normal budget, this gives more weight to the expenses you’ll likely face and that need to be paid out of your income. The first step is to draw up a list of the costs of basic necessities like accommodation, food and bills. As you grow older, you’ll likely be spending more time at home. Healthcare costs are likely to go up as your body becomes prone to illnesses. Later, a need may arise for an extra hand around the house or perhaps a full-time helper for care. You should also keep inflation in mind and prepare accordingly.
What Income Will I Have?
For most UK citizens, the State Pension is a major source of income in their retirement years. Some also get money from other sources like savings and property. Make sure you have enough secure income before you decide to take the plunge. An income that is ‘secure’ is guaranteed to come monthly. Savings interest may not keep up with inflation and your property may remain vacant, so these aren’t secure incomes. Secure income includes:
- Your State Pension
- Promised income from your last employer’s pension scheme
- Any other guaranteed income for the rest of your life
Remember: Most of your retirement income is taxable (including State Pension).
The State Pension
If you wish to work beyond the State Pension age, you can postpone cashing out your State Pension. It increases by 1% for every delay of 9 weeks and just under 5.8% for an entire year. It is inflation-proof and increases to maintain standard of living.
Salary-related pension from your last employer
A few employers offer their employees a defined benefit pension scheme (also known as career average scheme or final salary). You can take out your retirement income earlier or later but the normal age is 65. The more you defer it, the more you’re likely to get.
Workplace or personal pension
You also have the option to build up your own personal pension pot. As per new flexible rules, you can start withdrawing cash from this pot after your 55th birthday. However, if you use up money when you’re still working, you’ll have less to fall back on during retirement years. You could also use the money in this pot to buy a lifetime annuity providing a guaranteed income till you live.
Income from Other Sources
You might have income from alternative sources as well. These vary and there’s no guarantee of their receipts if any.
- Part-time employment
- Your own pension pot from which you can draw in small amounts or lump sums
- Rental income or sales proceeds from property
- Taking in a lodger or selling some of the equity in your home
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