The sooner you start to think about your retirement, the easier it is to start planning for it. The well publicised increase to flexibility in terms of how you ‘spend’ your pension pot will mean for many a need to get a better understanding of their financial future.
In the past one way of releasing income from your pension was to buy an annuity; a one off decision that could not be changed. Because the income was the same every year, many people “cut their cloth accordingly” and their lifestyle was dictated by the amount of pension income they received every month.
From April 2015, if you are 55 years old, it will be possible for people to be in receipt of the income from their accumulated pension but on their terms. They will decide how much they want year by year and they will bare the consequences in terms of tax to pay on the income, the impact on the value of the pension pot as it will still be invested and the ongoing effect of inflation on their requirements. For some the annuity route might still be appropriate, either partially or fully.
Greater flexibility and greater control is a fantastic step forward, however it requires someone to have a better understanding of their financial future. The following are just a few questions you might need to ask yourself:
- When will I want to start receiving my retirement income?
- Will it need to increase, reduce or temporarily stop in the years ahead?
- Does my partner’s income need to start at the same time?
- How much will I need to make sure all bills and direct debits are paid every month?
- What does that leave for living – clothes, spending money, hobbies, Christmas etc?
- Would I still like to have a holiday and what will it cost?
- Will I drive a car, until what age, how often will it be replaced, running costs?
The above chart is an example of a cash flow modelling tool which we use with our clients. It enables someone to see and plot what the future may hold. This will enable them to make informed decisions about what they need, when they need it, future variations, how the unexpected might impact, the impact of tax and what you might have left in the pot.
Author: Phil James, Grosvenor Consultancy Ltd
The Financial Conduct Authority does not regulate tax advice and some forms of offshore investments. The value of investments and the income from them can fall as well as rise and you may not get back the full amount you invested.
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