Retirement

It is never too early to start planning for retirement, particularly when it comes to pensions. The earlier you start saving for your golden years, the more comfortable your retirement should be.

Start with this checklist:

• State pension:
  • Checking your entitlement
  • When you can take it
  • What you’ll receive
  • S2P and SERPS
  • Deferring the state pension
  • Lump sum
• Other pensions:
  • Personal
  • Stakeholder
  • Company
  • Group personal
  • Lump sum
  • Annuities
  • Paying into someone else’s fund
  • Drawdown
• Savings:
  • ISAs
  • Friendly Societies
• Downsizing:
  • Understanding the financial implications
  • Investing the surplus
  • Other options
• Equity release:
  • Who is eligible
  • Lifetime mortgage
  • Home reversion
  • Income
  • Taking advice
• State benefits:
  • Disabilities
  • Other benefits
  • Sources of advice
• Plan ahead:
  • Cost of living
  • Leaving money
  • Death duties
  • Making a will
  • Codicils to wills
  • Funeral planning

State pension

• Ask for a pension forecast from the Pension Service at www.thepensionservice.gov.uk. This will tell you how much state pension you will be paid at retirement age, based on your National Insurance (NI) payments and any NI credits for staying at home looking after a family. If anything looks incorrect, contact the HM Revenue & Customs NI contributions office.
• The earliest you can take your state pension is currently 60 for women and 65 for men. This is changing. The state retirement age for women is rising to 65 over a number of years – the change affects women born on or after 6 April 1950. By 2020, the earliest state retirement age will be 65 for both men and women.
• Between 2024 and 2046, the earliest state pension age for both sexes will gradually rise to 68. You will have to have been born on or after 6 April 1959 to be affected by this change.
• About four months before your earliest possible retirement age, you will be sent a retirement pack by the Pension Service, which will include a pension forecast and an invitation to claim. You have to sign and send back the form if you do want to claim the pension then.
• The full state pension for a single person in 2009-10 is £95.25 a week – £57.05 a week for a wife on a husband’s NI contributions. Pension levels usually increase every April. Civil partnerships will be taken into account from 2010.
• The amount of your pension will depend on the number of years you have paid NI contributions or have been credited with contributions – for example, because of illness or unemployment. Under some circumstances, you can pay backdated contributions to boost your pension entitlement but this might reduce your entitlement to benefits, such as Pension Credit.
• You might be entitled to State Second Pension (S2P) or its predecessor State Earnings-Related Pension (SERPS), if you paid more than the minimum NI needed for a state pension and did not opt out of either scheme. If you are thinking of opting out of S2P, take professional advice.
• Widows, widowers and surviving civil partners may be entitled to a proportion of their dead spouse or partner’s SERPS or S2P, depending on date of death and when the person was due to receive their state pension.
• You do not have to claim as soon as you are eligible. If you delay, you may be entitled to a lump sum or a bigger pension later on. If you defer for a year, your pension will rise by more than ten per cent. Delay by five years and it will go up by more than half. You may also choose to take a lump sum instead, which will be the total of the pension you have not taken plus interest of two per cent a year above Bank of England base rate. If you have already started taking your state pension, you can choose to defer later on – but you can only defer once.
• All state pensions are taxable, as is any lump sum. If you claim Pension Credit, Housing Benefit or Council Tax Benefit, the lump sum is not taxed. The amount of tax you pay depends on your total income and tax allowances.
• People aged 80 or more are entitled to a non-contributory pension, which was £57.05 a week in 2009. You need to have lived in the UK for at least ten years in the 20 years since your 60th birthday.

Other pensions

• Personal pensions are sold by banks, building societies and life insurance companies. They invest what you save and you can set up as many personal pensions as you like. You can get tax relief on your personal pensions savings, up to the amount you earn in any year, with the amount capped at £245,000 in 2009/2010. See www.direct.gov.uk for details.
• The amount of pension you get depends on how much you have put in, how many years you have been saving and how successful your pension fund(s) have been. You can start accessing your personal pension from 50 but this rises to 55 from 2010.
• Stakeholder pensions are a low-cost form of personal pension and are designed for people who don’t have much to invest. You can save as little as £20 a month.
• Company pensions are also known as occupational pensions. You and your employer both contribute – your contributions can be set against the tax you pay.
• Group personal pension schemes are personal pension schemes where your employer has arranged special rates with a pension provider – a discount for a bulk.
• Pension funds do not pay Capital Gains Tax on their investments.
• Take independent financial advice before entering into any personal pension arrangements. The earlier you start saving, the more likely you are to receive a larger pension when you retire.
• You may choose to take a lump sum of up to 25 per cent of your pension fund value at any point between the date you become eligible and your 75th birthday.
• You may pay up to £2,880 a year (2009 figure) into someone else’s pension. This also attracts tax relief.
• You can choose to take annuities – a guaranteed future income – from your pension fund(s). The amount you receive will depend on your age, gender, health, life expectancy and the current annuity interest rate offered by your chosen provider. Under some pension schemes, you have to take an annuity when you take a lump sum.
• With some pension funds, you can choose to draw an income directly from your pension savings (drawdown). On your death, Inheritance Tax might have to be paid on the remainder of the fund.

Other savings

• Use your full ISA limits every year, if you can afford it – they are tax-free. Since October 2009, the cash ISA limit for those aged over 50 is £5,100, up from £3,600. The share ISA limit for those over 50 is £10,200, up from £7,200.
• Friendly Societies are another route for tax-free savings. You are allowed to save £270 a year tax-free with them, or £300 in instalments over a year.

Downsizing

• If you are an empty-nester looking to downsize, take your time, do your sums and work out whether you’ll be much better off. See Buying or selling your home for more details.
• Remember that the move is designed to release money locked up in bricks and mortar, so you need to know how you are going to invest the proceeds. It should be a substantial sum to make the move worthwhile, so it is best to take professional advice.
• If you do decide to downsize and you have always wanted to live in a different part of the country or abroad, check out the new location thoroughly – if it is a place you visited on holiday, it will be very different out of season.
• Consider alternatives to moving, such as taking in a lodger or running a small B&B. See Making extra money for details about lodgers and contact your council about B&B regulations. You might also want to consider a part-time job – many stores value the experience of age.

Equity release

• If you own your own home, are having trouble making ends meet and do not want to move, you can consider equity release, which will give you a lump sum or a regular income from selling part of the equity in your home. You remain living there and are responsible for its upkeep.
• One version is a lifetime mortgage – a loan secured on your home. You get a lump sum, out of which you make mortgage repayments and use some money to live on. The mortgage, including outstanding interest, is fully repaid when you sell the property.
• Another version is home reversion. You sell part or all of your home to a company or individual and stay there as a tenant. The home is sold when you move out and the reversion is paid off. You will typically be paid between 20 and 60 per cent less than the value of your home because the buyer must wait before selling the property.
• If you fail to pay rent under a reversion or break the terms of the lease, you could be evicted.
• Under some schemes, lenders will accept a share in the increase in value of your home when it comes to be sold instead of a proportion of the interest you would be charged.
• Schemes that give a regular income may be based on an annuity and the amount you are paid will depend on your age, gender, health and how long you are expected to live.
• There are fees and costs for equity release: arrangement fees, legal costs, buildings insurance. If these are rolled up into the debt, you will receive less.

State benefits

• If you have a disability or suffer from poor health, you may be eligible for Attendance Allowance. This pays for a helper, is non-taxable and is worth £47.10 or £70.35 a week (2009), depending on the amount of time a carer spends with you.
• Being eligible for Attendance Allowance may mean that you can claim other benefits, such as Pension Credit or Council Tax Benefit‚ or to an increase in those benefits.
• Additional benefits you might be able to claim as a pensioner include Guarantee Credit, Savings Credit, Housing Benefit, Social Fund payments, heating costs, Disability Allowance, Carer’s Allowance and help with health-related costs.
• Many sources of advice about state benefits can be found online or by calling the Benefit Enquiry line. Freephone 0800 88 22 00; textphone (freephone) 0800 24 33 55.

Plan ahead

• When people retire, some costs fall substantially, while others rise. For example, you have no commuting costs but medical insurance premiums can increase. Plan to balance out these fluctuations.
• If you wish to leave money to friends or relatives, work out your total net worth. If it is more than £325,000 or £650,000 for a married couple or civil partners (from 2010), it is likely that your estate will pay inheritance tax on assets worth more than the threshold amount when you die.
• Make a will. If you do so, assets left to your spouse or civil partner are tax-exempt. If you do not, the state will divide up your assets and leave them to a wider range of your relatives – and it may take all your assets if you aren’t survived by any sufficiently close relatives.
• If you have given a substantial sum to someone up to seven years before you die, some or all of the gift may be exempt from death duties. Gifts to charity are exempt.
• You can give away up to £3,000 a year without death duties and make as many individual presents of up to £250 a year as you like without any tax liability.
• If you have any wishes that you would like taken into account when you die, you can either include them in your will or add a codicil to your will. Lodge your will with a solicitor or another trusted party – it needs to be accessible when you die.
• To save your family distress, you can also plan your funeral. You can lodge details in a codicil to your will or with an undertaker, if you want to choose one in advance. You can also pay for your funeral in advance. Many undertakers accept payment in advance or by instalment but, as with any major expense, it pays to shop around. That might sound maudlin but at least then you are more likely to be given the kind of service you would like.