Retirement planning
Retirement can be the best phase of your life. When planning for retirement there are important considerations that need addressing. If you are planning to retire within the next couple of years and are on a Final Salary Pension Scheme I’d like to share an important piece of advice that I received.
You are able to apply for a pension forecast in advance, in my case, this was an NHS pension where you receive 2 figures.
These are
- Your Annual Pension Payment – to continue for life
- Your lump sum figure – a one off payment on retirement and depending on your age at retirement could be tax free.
When applying for a final salary pension , applicants are given the option to exchange some of their annual pension for an increased lump sum. In the case of an NHS pension, for every £1 of pension given up, you will receive an increase of £12 in your lump sum on Retirement.
This can see your lump sum increase by a much larger amount and can look like a fabulous windfall. Almost a small lottery win.
However here is the advice and note of caution.
Do not automatically be excited by the larger lump sum and jump straight into that option, it may not be the best one for you.
As part of your retirement planning you need to calculate your financial requirements, all your outgoings and plan your budget. The Money Advice Service has a useful budget tool
What does this mean
To put this very simply. If your original pension sum provides you with an adequate income, the lump sum is enough for an emergency fund with some to splash on hobbies and fun then this may be the better option.
For example, if your pension is £13000 per annum with a lump sum of £46000 and you have calculated that you need £11000 per year to live then that is a good option for you.
Consequently, sacrificing some of your pension to increase the lump sum to a larger amount of say £67000 as an example, would mean the smaller annual pension is £10000. A larger figure may look exciting but failing to look at your requirements and create a budget showing that £11000 per annum was required – you would be left with a shortfall of £1000 per year for living costs.
This then leads to the question – Where are you going to find that extra £1000 per year from? If you are having to dip into your lump sum savings, then it will dwindle rapidly as you at relying on it for income. £1000 is a lot to find, and in the current financial climate your remaining lump sum probably won’t be earning that in Interest per year.
Consequently if you do sacrifice some of your pension for a larger lump sum and the reduced pension is more than adequate to cover your financial needs then go for it! That’s a win, win situation and you can have a really comfortable retirement.
The take home message from this is that when planning for retirement you need to plan a budget for living costs and in that not just essentials but for holidays and leisure pursuits. After working hard for many years after you stop working there will be a lot of leisure time to be enjoyed and you don’t want any money worries after retirement.
Think for the long-term and not just the excitement of the first couple of years of your retirement because let’s face it most of us are hopeful of many years of fun filled freedom without any financial worries.
Take it from me – my new mantra is that Retirement is the best job I ever had.
Let me know how you planned your retirement budget or if you are in the planning stages have you requested your forecast yet to help you plan your budget – I’d love to hear from you
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