Approaching retirement: Five years to go
With five years or less until you retire, there are still things you can do to maximise your retirement income. Your other priority will be to protect your pension pot.
Review your retirement plans thoroughly
Request up-to-date statements from your personal and company pensions to give you an estimate of how much income you'll receive in retirement. Remember to track down any dormant personal and company pensions, too. This can be done via the Pensions Tracing Service at direct.gov.uk.
Also ask for an update of your state pension forecast so you know how much you'll receive from the Government. This can also be done at direct.gov.uk.
As well as obtaining these estimates of your future pension income, include your savings and investments in your review. These can be used to supplement your pension income.
Find out how much you'll need to live on
Use our tool ‘Your life once you stop work' to give you an idea of how much it will cost to support the lifestyle you would like in retirement. This uses average figures for typical costs, such as holidays and health club memberships.
If there's a shortfall between your forecast retirement income and your projected outgoings, you may be able to make this up by increasing payments into your pension or other savings and investments.
If the shortfall is significant, you might need to revise your plans. This could include delaying your retirement – as this can increase your pension income – or going into phased retirement and supplementing your income by working part-time.
These are important decisions and a financial adviser can provide valuable advice on your options. Alternatively, contact Standard Life on 0845 279 8810.
Consider less risky investments
With five years or less before you retire, you'll want to protect your pension from downturns in the stock market if you're planning to take an annuity. You can do this by moving your money out of equities and into less risky investments, such as government bonds, gilts and cash.
Rather than do this yourself, it's possible to select a lifestyling option from your investment funds. This is available from Standard Life's MyFolio funds, where your money is moved automatically to derisk your pension and ensure it is suitable for an annuity or a tax-free lump sum.
We've also taken lifestyling a step further with Dynamic Lifestyling. These are retirement funds that leave some money invested in equities, so you can benefit from potential growth in the stock market. As well as offering you the protection of less risky investments, Dynamic Lifestyling can adapt to your needs and changes to pension legislation.
Remember investment returns aren't guaranteed. The value of your investment can go up or down and you may get back less than you paid in.
Boost your pension payments as much as possible
You still have time to maximise your retirement income. And remember, any payments you make into your pension will attract tax relief.
Try to increase your monthly pension payments. If you're a member of a company pension scheme, you might want to do this through a stakeholder pension or an Additional Voluntary Contributions (AVC) plan. Depending on the terms of your company pension, your employer might even match any increase you make in payments.
Any bonuses or windfalls can also be used to make lump sum payments into your pension.
You may also be able to take advantage of previous years' unused allowance. Under the current pension rules you can carry unused allowance forward for three years.
Tax rules and legislation may change. The value of tax relief may change and will depend on your financial circumstances. The information we have given is based on our understanding of law and current HM Revenue & Customs practice.
Decide how you're going to take money out of your pension
You need to decide whether you want to take an annuity or draw income from your pension pot.
An annuity gives you a guaranteed income for life, while income drawdown leaves your remaining pension pot invested.
Although you can change your mind between now and retirement, your decision will affect what you do with your pension now.
If you want to take an annuity, it's sensible to consider derisking your pension funds.
If you go for income drawdown, you will need to check with your pension provider to make sure you can access this via your existing pension. If not, you may want to think about transferring into a pension such as a Self Invested Personal Pension (SIPP) which comes with income drawdown as standard. At this stage, you can consider transferring existing pension schemes into a SIPP.
Whether you go for an annuity or income drawdown, you can normally take up to 25% of your pension pot as a tax-free lump sum when you retire.
You may decide to splash out on a dream holiday, a new car or a conservatory for your home. Or you could even reinvest it to supplement your pension income
Passing on your wealth
If your plans are on track and you're confident you have enough income for your retirement, you might want to start thinking about passing on your wealth.
If you don't already have a will, the first step is to get your will written. This will ensure your wealth is distributed according to your wishes, rather than those of the state.
Next, assess the value of your estate; this is everything you own, including your share of any jointly owned assets. It's also sensible to check what arrangements are in place for your pension if you die. Annuity payments will, for example, stop unless you take an annuity with an option for a partner or adult dependant to receive a pension if you die before them.
If your estate is worth more than the inheritance tax threshold (£325,000 in 2011-12), there could be inheritance tax liability when you die. Planning now can help to reduce this bill and maximise the amount of wealth that is passed on.
Inheritance tax exemptions allow you to make gifts without having to pay any inheritance tax, so take advantage of these. You can make other gifts, known as ‘potentially exempt transfers'; these will be exempt from inheritance tax as long as you live for seven years after making the gift.
Trusts and other inheritance tax-planning vehicles can also be used to pass on your wealth tax efficiently.
Increasing your tax efficiency
As inheritance tax planning can be complicated, it may be worth speaking to a financial adviser. Alternatively, call Standard Life on 0845 279 8810.
