Guide to Retirement

Planning for your retirement is possibly the most important financial decision you will ever make, with life expectancy increasing year on year, we are now seeing the potential to spend almost as many years enjoying retirement as we have spent saving for it. Planning for it correctly will provide you with the standard of living you wish after you stop work.

When is the right time to start?

In the current 2012/13 tax year the state pension is up to £107.45 per week, if you would not be able to survive financially on this amount then saving towards your own retirement income is extremely important.

If you start planning for retirement in the early years this will mean that your investment will have the greatest time to grow.

Currently, the State Pension age is:

• 65 for men.
• 60 for women born on or before 5 April 1950

The retirement age in the UK is generally around 65, if you're a man you'll get your state pension when you reach age 65, and 60 for women born on or before 5th April 1950.

• Between April 2010 and 6 November 2018, the State Pension age for women born on or after 6 April 1950 increases gradually from 60 to 65 until the State Pension age for both men and women is 65.
• Between December 2018 and October 2020, the State Pension age for both men and women will then increase gradually to 66

There are also suggestions that the state pension age for men and women will rise to 68 by 2046.

For many, retirement may seem a long way off, for most they will need to save over their whole working life in order to amass enough savings and pension to support them in retirement.

• You have longer to save
• Your pension fund has longer to grow

Putting off starting a pension has the obvious disadvantages that you have a shorter time to save and less time for your pension fund to grow. So it is logical that to achieve the same pension fund over a shorter period, you have to make higher pension contributions.

How many paydays?

One way of looking at this is to think about the number of paydays you have before you retire, and the number you hope to have afterwards.

Imagine you start your pension plan when you’re age 20, and you plan to retire when you’re age 65. You have 540 paydays between starting your pension plan and retiring.

But if you keep putting things off until you’re aged 40, you’ll have far fewer paydays to save.

How much income will you need once you have retired?

There’s always a danger you’ll underestimate how much you need. Most of us probably feel we could do with a little more money when we’re working. Will that change so much when you stop working?

A sensible rule of thumb is to aim for a retirement income of around two thirds of your earnings when you retire. Either way, you need to decide how much you want, so you can plan and it is often easier to think in relation to your current earnings and decide how much of your salary you would want to maintain.

Then you need to consider how much you are already expecting from existing sources this could include State Pensions, a mix of investments, property and savings that you have already built up which will be available to you when you stop work.

Do not rely on the un-known.

If you think you already have your retirement plans covered, it could be wise to think again. A pension plan or some other type of investment puts you in control of your financial future. Other, less certain plans may not have the outcome you hope for.

"I'll downsize and use my home equity for my pension"

Relying on the equity in your home to fund your retirement income could be fraught with difficulties. For a start, you can’t accurately predict how much your home will be worth nor can you predict the cost of the type of home you plan to downsize to.

You may find that you have to compromise your pension or your home move, or both.

"I'm due an inheritance, that will be my pension"

Placing too much reliance on an inheritance could be unwise since:

• You don’t know exactly when you’ll receive the money
• The person leaving the money may change their will
• They may decide to spend their money, or it could be used to pay for long term care

An inheritance should always be considered to be a bonus rather than a guarantee.

Financial Advice Service

You can learn more about our Financial Advice Service and how we can help with your overall financial planning here.

If you are committed to securing your financial future, you now need to take some serious action.

If you have some plans in place, that’s a great start, but don’t let them go out of date, make sure that you are still saving enough and are you getting the most from the tax advantages of pensions and ISAs.

Since you set up your retirement plans it’s possible that your circumstances and aspirations have changed. If they have, you would be wise to take have a review.

What should you review?

Your State pension
How much state pension you receive depends on how many years’ National Insurance Contributions you pay while you’re working. You might also receive an additional state pension – based to your earnings. You can get more information on your entitlement from The Pensions Service.

Company pension scheme benefits
If you’re a member of a company pension scheme you should receive an annual statement of your benefits. If you’ve been a member of a company scheme in the past it’s normally possible to transfer benefits from other schemes to your own pension plan but always take advice before you do.

Your current personal or stakeholder pensions
How are your investments performing and are your pension contributions still realistic?

Your other investments
Make sure that you are making the most of tax efficient investments such as ISAs and are your investments performing well.

Risk and Reward:

Another key factor is how much risk you're willing to take with your money. In general the more risk you're prepared to take, the higher the potential returns could be. The downside is that any losses are potentially greater, so most pension funds transfer your accumulated pension to safer investments as you near retirement to protect them from market fluctuations nearer your retirement date.

Think about how much risk you are willing to take. This will be determined by your circumstances, age, goals and other factors, but generally the longer the time you have to invest the greater the potential returns available by investing in riskier Stocks and Shares, when compared to cash, or property.

Pension funds tend to be either:

• Stocks & Shares – Some plans allow you to choose individual shares, but this carries the highest risk to your capital and requires your constant management
• Tracker Funds - Tracker Funds allows you to take advantage of the full growth potential of stocks and shares without having to manage your own investment. The aim of this type of fund is to track the performance of an index, e.g. the FTSE 100. Because your investment is tracking an index, if share prices go up and down, your investment is designed to follow suit.
• Actively Managed Investment Funds – Funds are managed by investment specialists with the intention of out performing a particular market it selects from. One of the main advantages of active funds are that they give small investors access to professionally managed funds, but again they are usually only investing in one type of asset or market so the value will reflect the rises and falls of that market.
• A managed basket of funds – One of the most popular for those building money for the future, these funds mix a blend of assets creating a diversified portfolios of equities, bonds and other securities, which would be quite difficult (if not impossible) to create with a small amount of capital. Each shareholder participates proportionally in the gain or loss of the fund, but since it mixes different assets this usually stops it following just one market’s falls and rises. Funds are rebalanced by the managers to maintain the optimum mix of risk and return, but savers should review the amount they are contributing regularly to ensure their plans remain on track to provide for their retirement

Financial Advice Service

You can learn more about our Financial Advice Service and how we can help with your overall financial planning here.

Your options at retirement

You have a number of options about what to do with your maturing pension fund. You can:

• Use the whole fund to buy an annuity,
• Take up to 25% of the fund as tax-free cash and use the remainder to buy a smaller annuity. If you choose this option you have to do this before age 75,
• Buy an annuity in stages rather than all at once – this can be handy if you carry on working part-time,
• Transfer it all to an income drawdown plan that lets you take some income while your fund remains invested. This is usually only suitable if you have a large fund.
• You don’t need to buy your annuity from your pension provider – you can shop around for the best deal.
• More on annuities

What sort of retirement income will you require?

When you retire the money saved in pension funds is used to purchase an annuity from a life Company. In effect what you are doing is swapping your funds for a guaranteed regular income, but the amount of income you will get is tailored to your requirements and the annuity reflects the Life company view on how much can be paid to you. If you used your pension fund to buy an annuity, that’s fine – you don’t need to make any more decisions.

If you chose income drawdown, you need to keep an eye on how your pension fund is performing and annuity rates, to make sure you’re still making the best choice.

Savings and investments

Just because you’ve retired doesn’t mean you can’t do any more to maximise your retirement income. If you have money to invest, you can use it to produce more retirement income.

The interest from fixed term savings and investments can be a useful way to supplement your pension income. NatWest has a range of short fixed term savings as well as long term investments that can compliment your pension income. Some of our bonds offer at least a return of capital at the end of the term. That way you’ll not be reducing your retirement pot.

• You can find more about our investment options here
• You can find more abut our savings options here

Protect your assets

When you retire, you also have to think about other issues such as passing on your wealth to your dependants – in the most tax efficient way you can.

None of us want to give the taxman more than we have to. But without proper planning, it’s possible that some of your estate will be eaten up by taxes when you die.

In 2012/13 inheritance tax is charged at up to 40% on the value of an estate in excess of £325,000. When you consider the value of your home and your savings, it’s easy to see why so many people could be affected by this tax.

Fortunately there are steps you can take to minimise any tax liability you may have. There are also protection plans you can take out to meet an inheritance tax liability on your death.

• You can find more out about inheritance tax planning here

Do I need to wait until state pension age before I can take my personal or stakeholder pension benefits?
No, personal and stakeholder benefits can be taken any time between age 50 and 75. From April 2010 the minimum age when you can take your benefits will change to 55.

Is my pension taxed?
Yes. When you retire, you may receive income from a number of sources such as the state pension, company and personal pensions and the income from investments and savings. Remember, you're still eligible for personal allowances after you retire. With a personal or stakeholder pension you can take up to 25% of your pension fund as tax free cash.

Can I get pension tax relief even if I don't pay income tax?
Yes, you can pay up to £3,600 per year into a pension and get tax relief.

Is there a limit on how many pension plans I can have?
No. But you should always seek financial advice if you're thinking about taking out a new pension plan if you're already a member of a company scheme.

If I go on maternity leave can I keep on making my personal pension contributions?
Yes, even if you have no earnings you can still pay up to £3,600 a year and get tax relief.

What happens if I die before I retire?
With most modern pension plans, the value of your pension fund will normally be returned to your dependants if you die before you retire.

Financial Advice Service

To learn more about our Financial Advice Service and how we can help with your overall financial planning.

I already have a pension with you
If you already hold a pension with us, this was purchased before 3rd December 2012, and would like key information, have a query or want to know how to contact us.