Money and Budgeting

Money and budgeting R etirement is the reward for a hardworking life – but while you may be ceasing work, you should not allow your money to retire as well. It is important that it continues to work hard for you, so that you’ve got the financial security and flexibility you need. There are many money-related decisions to be made when you retire: get them right, and your income could increase year by year; fail to plan, and you might be faced with making personal cutbacks at a time when you should be relaxing and enjoying yourself. With people living longer, secure pensions from salary-related pension schemes fading fast and new pension freedoms that have reduced the use of annuities, more pensioners are directly exposed to the three great risks of retirement: longevity risk (outliving your savings), inflation risk (the buying power of your money falling over time), and investment risk (being exposed to the ups and downs of the stock market). Inflation means a sustained rise in prices – not just a temporary hike in the cost of coffee or petrol, but the relentless upward drift of prices over time that means your money buys less today than it did in the past.

So, what steps Even low rates of inflation have a big impact on prices can you take over a long period: for example, if inflation averaged 2 to avoid being per cent a year (the official target for the UK), £100 strapped for cash once you retire? after 25 years would buy only the same as £61 today, meaning you’d have to cut your spending by over a third. Aviva (an insurance and pensions provider) suggests that over three-quarters of pensioners are worried about the rising cost of living and having to continue working to make ends meet. Obviously one way of increasing the problem is to bury your head in your hands and do nothing. So, what steps can you take to avoid being strapped for cash once you retire? Whether you are close to giving up work or are several years away from retirement, the most important thing to do is carry out a serious review of your retirement plans. This will help you work out what options there are for maximizing and sustaining your future income. There are many ideas on what makes a good financial plan, but the core elements are the same. In order of priority, a typical person should normally aim to:

1.Sort out any problem debts. 2.Stay in your workplace pension scheme. (Since your employer must contribute on your behalf, opting out is like turning down part of your pay!) If you are not an employee, save through your own pension plan. 3.Get term life assurance if anyone is financially dependent on you. 4.Build up at least three months’ worth of outgoings in accessible savings, such as a cash Individual

Savings Account (ISA) to cover emergencies. 5.Buy a home if you are ready to settle somewhere. 6.Save and invest to achieve other goals.

Everyone’s circumstances and resources are different, so you may have a slightly different plan and, if you’re already retired, maintaining a stable income from your pensions will often be your second highest problem after sorting out problem debts. In some situations, you may need to get professional advice to help you. If you have problem debts, you should urgently consult one of the free, independent money advice agencies, such as Citizens Advice, nationaldebtline.co.uk or stepchange.org. These impartial, non-judgemental organizations can efficiently help you deal with your creditors, without stigma, and identify any additional sources of income you may be eligible for. Debt problems get worse if you ignore them, so be honest with yourself that there is a problem. Warning signs include borrowing to buy day-to-day essentials, and taking out new loans to pay off old ones.

To ensure you have a comfortable retirement, you will need to carry out a full financial health check. If you are still pre-retirement, this involves looking ahead to your income and likely spending in retirement. If you are already retired, you should be repeating this health check on an annual basis to get a clear view of your current financial position and how it may change in future. For pre-retirement planning, you should get a State Pension statement (which says how much State Pension you are currently entitled to once you reach State Pension age and whether there is any scope to improve this), and check the benefit statements you receive from pension schemes you belong to now and have done in the past. If you don’t have recent statements, contact the employer or pension provider concerned to ask for one. The government is backing an industry initiative to introduce ‘pension dashboards’ – online apps that will let you automatically see all your pensions in one place. Once that’s up and running (maybe in 2021), it will take a lot of the legwork out of this part of doing a financial health check. But until then, you will have to rather laboriously gather up all these pension statements for yourself. If you’ve lost track of old pensions, there is a free government service, the Pension Tracing Service, gov.uk/find-pensioncontact-details, which can help. (Be aware that commercial firms with a similar name charge.)

Factor in any other sources of retirement income, for example, from non-pension savings you have built up, to give you a complete picture of your budget from the income side. Once you’ve done that, work out how much you are likely to need to spend in retirement. Bear in mind that, if your income is high enough, some of it will go in income tax. Be as realistic as you can about your spending – for example, how much you are likely to save once you are not travelling to and from work. Remember to factor in holidays and repayments on any debts you might have.

The Good Retirement Guide edited by Jonquil Lowe is ©2021 and reproduced with permission from Kogan Page Ltd