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Preparing your finances for retirement: what you need to know

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Hayley Tearall

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A guide to preparing your finances ahead of retirement. 

There are many ways you can prepare for retirement. One way is to start thinking about your finances. Whether retirement is rapidly approaching, or still feels a long way off, it’s worth planning ahead so you can make sure everything is in order.

This blog explores how to work out how much money you’ll have when you retire, how to make a budget that works for you, and some useful tools you can use to increase your income and prepare well for the season ahead.

Work out how much money you’ll receive as your State Pension

Your retirement income could be made up of a few elements. One of these is a State Pension, a payment from the UK Government that most people receive when they retire.

Who is eligible for a State Pension?

You’re eligible for a State Pension if:

  • You’re a man born on or after 6 April 1951

  • You’re a woman born on or after 6 April 1953

  • You’ve made National Insurance contributions for a combined total of at least ten years.

If you were born before this, you’ll get the old State Pension (also known as the basic State Pension). If you reach the State Pension age before 6 April 2016, you’ll get this kind of pension.

Note; You are still eligible for a State Pension if you have other income sources, like a personal or workplace pension.

Work out your State Pension age

You can check when you’re eligible to start receiving your State Pension on the GOV.UK website. This is a good starting point when preparing for retirement, as you can see what age you’ll be and make a plan to retire when you can afford to.

How much will I get for my State Pension?

The current amount for a full State Pension is £203.85 a week. In some circumstances you may get more than this, such as if you delay taking your State Pension.

Note: you may sometimes be taxed on your State Pension, if your income is above your Personal Allowance. If the State Pension is your only income, you’re responsible for filling in a self-assessment form and paying any tax you owe.

Can I increase my State Pension?

There are some ways you can increase your State Pension amount. One of these is making voluntary National Insurance contributions to make up for any gaps in your record. Although you are eligible for the minimum amount of State Pension if you’ve paid National Insurance contributions for a total of at least ten years, every year longer than that means you’ll get a little bit more, until you reach the maximum amount of entitlement (a Full State Pension) at 35 years.

Another way to increase your State Pension amount is to delay claiming it. For every nine weeks you defer your State Pension, it increases by around 1%, or 5.8% for the full year (although this may not be the case if you receive certain benefits).

Work out how much you’ll get from other pensions, savings and investments

You may find you’re entitled to other sources of income, beyond your State Pension. These may include:

  • Workplace pensions

  • Defined benefit pensions (also known as final salary pensions’)

  • Private pensions

  • Savings and investments

Workplace pensions

If you’re part of an existing workplace pension scheme, you should be able to access your annual statement showing how much you’ve contributed to your pension pot. It’s a good idea to speak to your pension provider to find out what your retirement options are.

Defined benefit pensions

Defined benefit pensions are a specific type of workplace pension, usually offered by the public sector and Government employers. This type of pension gives you guaranteed annual income for life, typically based on your final (or average) salary.

Private pensions

If you’ve been contributing to a private pension, you should receive annual statements with how much is in your pension pot. There are a variety of private pensions, including stakeholder pensions which must meet certain standards set by the UK Government. Get in touch with your pension provider to see what your options are for retirement.

Other income

If you’ve got a private pension, or any savings or investments, these could boost your income when you reach retirement.

Work out how much money you’ll need in retirement

When you retire, it’s likely that you’ll have less money coming in. That’s why it’s important to take a good look at your outgoings, and how much money you need each month.

Create a retirement budget

Once you know how much money you’ll be getting, and how much you need to spend on things like rent or a mortgage, bills and other basic necessities, it’s time to create a budget. Break your spending down into the essentials and then the nice to haves’.

The basics would include things like:

  • Housing costs

  • Utility bills

  • Groceries

  • Day-to-day travel

  • Basic needs like toiletries, clothing etc

The nice to haves’ would include things like:

  • Meals out

  • Holidays

  • Leisure activities and fun

Once you have worked out your minimum spend each month, you’re in a position to see if you have enough money coming in to cover those costs, and make solid plans as to how often you can afford to buy the luxuries or non-essentials.

How do I increase my retirement income?

There are a few ways you can prepare for retirement if you need to boost your retirement income. The two main ways are to pay more into your pension pots now, or to delay taking money from them (including your State Pension). You could also choose to retire gradually (you can claim some pensions while still working).

Seek financial advice and support

With so many elements to consider before retirement, you don’t have to figure it all out on your own. There’s support and information out there to help you make the best decisions for you.

Speak to a financial advisor

If you’re unsure what your retirement income will look like, or you’d like to find out what your best options are, you can speak to a financial adviser. They’ll help you figure out exactly what your finances will look like, and work out if you can afford to retire, or if there are other ways you can prepare ahead of retirement to guarantee the best possible income.

Get support from charities and organisations

There are several organisations out there who offer advice and information on pensions, retirement, and more. One example is Age UK, who offer a wealth of advice and support whether you’re at retirement age or preparing ahead of time.

See if you’re entitled to any benefits

You can use our benefits calculator to see what your income in retirement might look like alongside any income from pensions. You may be entitled to some benefits, such as Pension Credit, which is available for those of retirement age who are on a low income. You might still be eligible for Pension Credit if your income is higher but you have a disability or care for someone else (for a full list of who can claim Pension Credit and what you’ll get, go to GOV.UK).

Receiving Pension Credit may also open doors for you to receive other benefits such as Housing Benefit, Cost of Living Payments, discounts on Council Tax, a free TV licence, help towards certain NHS treatments and transport, support for mortgage interest, and more.

Get rid of debt before retirement

If you have debts and you’re planning for retirement, it’s important to seek debt advice and try and clear your debts.

Here at CAP, we offer expert debt advice, totally free of charge. We’ll create a bespoke budget for you and support you through your best route out of debt, depending on your individual circumstances.

Whether you’re planning ahead for retirement or it’s looming on the horizon, we’ll be with you every step of the way, offering face to face support in your local area. Together, let’s find a solution that works for you and leaves you in the strongest possible position when you retire.

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