31 Jul 2023

What to do to prepare for your retirement now

At Monahans, we help our clients to gain a comprehensive understanding of their personal and business finances, encouraging them to plan early, and supporting them as they navigate the rules and guidelines that might impact them. This includes planning ahead for their eventual retirement. Whilst we would always recommend that clients seek out specialist financial advice, there are a few considerations we’d like to highlight.

We spend much of our lives working, so when it comes to retirement, we want to be financially comfortable and be able to enjoy the fruits of our working lives. The key is to think ahead and take steps well in advance, to ensure that you are in the best position by the time you stop work.

Even if you are a long time away from retirement age, it’s worthwhile considering what changes you can make now, that will pay off in the long term, these include:

Retiring without the burden of debt
You don’t want to find yourself in a position down the line, where your pension pot is needed to pay off historic debt, so it’s best to diminish the amount of debt you have whilst you are working. For example, if you have a mortgage, it would be beneficial to pay it off as early in life as possible, retiring with a large interest only mortgage could require you to sell the house that you have worked so hard for.

Add to your pension pot where possible
Regardless of age, it is always beneficial to save and to take maximum advantage of paying into your pension fund while you can.

Pension contribution rules can be quite complex and will depend on your level of income. But as a general rule, any year where you can maximise your pension contributions, it is always worth doing so, whether you work full-time, are self-employed or unemployed if it’s realistic..

Those who are out of work, perhaps due to raising children, can pay £2,800 a year into a pension fund, and will also receive a basic rate tax credit. As long as you have available capital, there is no reason not to make a contribution, even whilst unemployed.

The power of balanced professional advice
At Monahans, we’d always highly recommend to anyone who is saving, that they seek out good professional advice. Specialist financial advisors will consider all factors that might impact your savings and help you plan for later life, providing you with guidance tailored to your individual needs. For example, the type of investment advice that you might receive would vary depending on your age, financial situation and your goals for long term growth or shorter-term capital.

As retirement draws closer
Considerations for your retirement change the closer you get to this time period. Those who are anywhere between five and 15 years out from retirement should take time to consider what they can be doing to prepare now.

National Insurance Contributions (NICs)
Every individual has a National Insurance (NI) record made up of NIC or credits and we have spoken previously about the importance of keeping NICs up to date. To receive the new full state pension, you need 35 qualifying years of NICs and at least 10 years’ worth to qualify for any amount of UK state pension.

Regular reviews of these records are crucial because they give individuals the opportunity to ensure their HMRC records are correct and it allows them to make payments towards their NI statements, if necessary, which will plug any gaps in their NI history.

We would advise that individuals obtain a state pension forecast and review their NI record, which can be completed online via their personal tax accounts, or statements can be requested.

Paying in becomes increasingly important
Although paying the maximum amount possible into your pension is important at every age, it gets increasingly crucial as you approach your retirement date.

There are also factors to consider once you have entered retirement, for example when you do begin to draw on your pension, you will be eligible to receive a tax-free lump sum,up to 25% of the value of the fund. This is something that we always recommend that people take, particularly as this rule could easily be abolished with a change of government policy, so it’s worth taking advantage now whilst you can.

A succession plan
Those who are self-employed or own a business should always work with a succession plan in mind. As a business owner there are several available options, including passing the business onto your children, choosing to stay involved in a part-time capacity, or selling the business - which may release a sizeable sum to use during retirement. With this option, there are various reliefs available to you, such as Business Asset Disposal Relief which can bring the Capital Gains Tax rate down to 10%. Again, a specialist advisor will help to ensure that you are kept in line of the sometimes-complex rules.

It's also worth considering the process of passing on assets. Inheritance Tax planning involves a careful balance between living comfortably for the rest of your life and ensuring that your loved ones are looked after. Whilst nobody likes to pay the 40% inheritance tax, this might work out better in the long run. There is no right or wrong approach, but it’s crucial to ensure that you are aware of all the potential implications that come with the decisions you make, so that you are not caught off-guard.

Planning for the longer term
Whilst it may not be a popular topic, when planning for later life, it’s also crucial to take into account what will happen after you are gone, to ensure that your loved ones are not left with the burden of untangling your finances.

It goes without saying that you should ensure that your will is kept up to date. It is also worth reviewing your life insurance arrangements regularly, to ensure that they are still fit for purpose, particularly as it can get more challenging to find good-value policies as you get older. Again, we’d recommend speaking to an advisor who can ensure that the cost of the premiums you are paying are appropriate and that any pay-outs will help a surviving spouse or dependent family member.

If you need support with retirement planning or succession planning for your business, get in touch with the team today, who can help you to decide where to start.

Richard Brooks