These days people are living longer which in turn is increasing the timespan of their post-retirement life.
While the fact that average life expectancy has gone up is a good thing, one major concern that arises due to this is that people tend to run out of funds during their retirement phase. One of the prime causes of this is that many people tend to start saving for their retirement very late.
It is therefore important to have enough secure income or a source of income, post retirement, so you do not have to worry about how to pay your bills.
It is difficult to estimate how long one can benefit from their retirement savings as nobody knows how long they are going to live. Thus, your retirement savings are supposed to last longer than you think.
You must also make some provisions for any family members or other dependents that you would want to care of so that they can receive or inherit the unused income from your retirement savings once you pass away.
If you wish to continue living a certain kind of lifestyle after your retirement, it is important to make sure that you have enough stashed away to do so.
A lot of people have more than one source of income post retirement. These include:
Income that is regular and is guaranteed for the rest of your life like:
- Your state pension
- Pensions from a defined benefit scheme
- From your lifetime annuity
This source of income is something that you ought to get but the amount may vary. It is not even guaranteed to last for the whole of your retirement time span and includes:
- Paid work
- When you invest your retirement savings, but you can still opt to draw an income from it. This is called as a drawdown scheme
- Savings and investments
- Renting out a room in your house
- Rental properties you own
Other sources of boosting your income during retirement include:
If the expenses related to the maintainence of your current home is causing a severe dent to your retirement pot, you should give more thought to moving out of your current place into something smaller yet comfortable.
The smaller house will have fewer expenses, saving you some money.
You can sell or rent out any other properties you own or inherit. Renting it out can assure you a fixed source of monthly income and help you have a better retired lifestyle. If you sell your property you can invest the amount you receive in other things or keep the amount in your bank account and live off the interest that it offers.
The past few years have been marked by the scandal of mis-selling of Payment Protection Insurance (PPI) policies in UK. This stems from customers being mis-sold PPI policies without their consent or being wrongly told that it was compulsory for them to buy it.
PPI is a policy that is sold alongside loans, mortgages and credit cards. It helps the customers to pay their debts if they are unable to make payments because of being ill, unemployed or dead.
But, later on it was discovered that banks and other financial institutions mis-sold worthless PPI cover to customers who either didn’t know they were being sold PPI or were unable to claim from it in the future.
You can check for mis-sold PPI policies with your banks from whom you have taken out loans, mortgages or credit cards. If you realise that you have been mis-sold any such policy, you can make a claim all by yourself of with the help of the Claim Management Companies to get back money that you are rightfully owed.
This amount can then be kept safe in the bank helping you gain interest of it and thus proving a source of income for you during your retired life.
Paying Tax on Your Pension Amount
Your pension amount is taxable just like any other income of yours. When you start using your retirement savings, about 25% of it that you use is tax-free. The rest of the amount that you start using as a source of income is taxable. The amount of income tax that you may have to pay depends on your total income of the year.
The Income Tax rates for 2017-2018 are:
|Income Tax Band||Your Income||Income Tax Rate|
|Personal allowance||Up to £11500||0%|
|Basic rate||£11501 – £45000||20%|
|Higher rate||£45001 – £150000||40%|
|Additional rate||Over 150000||45%|
You may have to take financial advice on how much cash you can take out from your retirement savings so that you do not end up paying more tax than you need to.
Long Life and Health
On an average people are living longer than expected. There is a 50% chance of a 65-year-old living to 90 years of age. However, people do underestimate how long they are going to live and this might create less problems when you have a fixed source of income to rely on. Most people do not have guaranteed income all their life, thus they can run out of money during their retirement phase.
Your health becomes a major issue when you are older. So, you need to have some extra money kept aside or have some source of income to ensure that when your health deteriorates you can afford to pay for your check ups and health care facilities.
Effect of Inflation
Inflation affects retired people more than the working population. Prices tend to rise during inflation and if your retirement savings does not keep up with the rising prices then it might put you in a spot of bother, financially, come retirement.
To keep your standard of living stable, your income should rise with the inflation rates. This can be made possible by buying insurance policies that help you keep up with your income while the inflation rates rise.
If you are relying on your investments and bank savings to have an inflation-proof income then the amount of interest or income that you earn through it needs to keep up with inflation too.
Leaving to Inherit
Many people desire to leave some money or all of their pensions savings to their family members or other important beneficiaries. You need to know that this may affect the retirement savings option that you are planning to consider and can lead you to opt for a relatively lower income during retirement.
The choices are even influenced based on whether they are taxed while any of it is inherited by dependents or family members.
Whether you opt for an annuity, drawdown or leave money in your retirement savings, it is essential that you fill a wish form that states who should inherit any cash or income from your retirement savings.
If you do not mention any of this in your form, your retirement product provider may not know who will inherit your savings and your heirs may have to pay Inheritance Tax. You should also make arrangements to ensure that the executor of your Will notifies your pension provider when you pass away.
What happens to your savings when you die?
If you die before age 75: Any lump sum or any income that is claimed within two years is paid tax-free.
If you die aged 75 or older: Any lump sum or income that is paid to your beneficiary (dependent or family members) is added to their annual income and then taxed at the appropriate rate.
If you are already retired, you can use the following tips to boost your retirement income:
- Defer your state pension: you do not need to do anything to defer your state pension. The government assumes you are deferring unless you actively claim it.
- Until recently, people had limited option other than buying annuity when they retire. This mainly involves, handing over your retirement savings to an annuity provider in exchange of regular income until you die.
- Check if you are eligible of any enhanced annuity.
- Before cashing in your pension or considering a drawdown policy, check your paperwork to see if there is a guaranteed annuity rate. If by any chance there is, it could be your golden ticket to a more comfortable retirement.
- Rent out your other assets.
- Start a business (online or offline).
- Search for some part-time jobs.
- Stay in work, which means if you work past state pension age, you will not be paying national insurance any more. For those earning between £8600 and £45000, that means an extra 12p for every pound they earn.
- You can earn up to £7500 a year under rent-a-room schemes that are available, which is tax-free by letting out a room in your home. Retired couples can each claim half of the allotted the tax-free.