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The countdown to retirement By Nina Montagu-Smith
Work out what your income will be Find out what shape your finances are in and income you can expect. The Pensions Service at the Department of Work and Pensions (thepensionservice.gov.uk or 0845 Ask your pension providers for projections of fund values at your retirement date. The trustees of employers' schemes will give you income projections. Once you know the value of your private pensions you can get an idea of your annuity income by visiting the Financial Services Authority's comparative tables at fsa.gov.uk/tables. There are ways to enhance your income. If you have savings or income to spare, consider topping up existing pensions - you will also benefit from tax relief. If you have final-salary pension schemes, ask the trustees if you can buy extra years. Under new pension rules brought in last April, you can now contribute up to 100% of your income - maximum £215,000 - to a personal pension each year. Alternatively, consider an immediate vesting pension - a facility offered by all providers. This is a risk-free way to cash in tax relief, especially if you're a higher-rate taxpayer. If you can't afford to pay any more into your pension, think about part-time work to boost your income. Sort out your paperwork Ask your providers to replace any lost policy documents. You may want to pool your personal pensions. Choose an existing provider that you are happy with which levies no charges for receiving the extra funds. Think about your estate If you think you will have more income than you need, consider estate planning - gifting some of it in order to avoid inheritance tax (IHT). Each individual can leave assets worth £285,000 (rising to £300,000 next year) free of IHT, the rest is taxed at 40%. Before you die, you can give away £3,000 a year without attracting IHT, and gifts made comfortably out of income are also exempt. It's also possible to give anyone £250 a year tax-free. Parents may give children £5,000 towards their wedding, and grandparents may give £2,500. Anything over and above these amounts is considered to be a potentially exempt transfer, meaning the donor must live for another seven years before the gift becomes free of IHT. You may also want to alter standard 'mirror' wills favouring each other. If one person dies first, leaving everything to the other, then the nil-rate band of £285,000 will only be used once as there is no inheritance tax between married couples. Think about leaving assets to children on the death of the first partner, instead. Based on today's nil-rate band, this could save your beneficiaries £114,000. How will you take your income? If you need to draw an income at once, the most secure route is via an annuity. You don't have to buy your annuity from your pension provider, who will almost certainly not offer the best rate. If you're married or have a civil partner consider how they'll cope if you die first. If they will need the income after you die, consider adding the widow's pension option. Do you want your income to rise each year in line with inflation? If you only choose a level annuity, your spending power will halve after 30 years. You can opt for a guarantee of five or 10 years, or a cashback guarantee, to ensure that if you die within the set time frame, the annuity will continue to be paid or your estate will receive some money back. These options can reduce your pension income, so consider whether you need them. If your spouse has his or her own pension arrangements, consider a single-life annuity, for example. Remember you can split your pension and buy several annuities - perhaps buying a guarantee for part of it, and taking a higher, level income from the rest. Unsecured pension If an annuity does not appeal you can leave your fund invested and draw an income from it. The minimum and maximum you can draw is set by the Government's Actuary Department, so all providers pay the same range of income. If you die, your estate will inherit what remains of your pension, subject to 35% IHT. This is a risky strategy and only recommended for wealthier retirees. Should you take your tax-free cash? You can take 25% of your pension as a tax-free lump sum. This will leave you with a smaller fund to buy an annuity, but you could invest the tax-free cash to provide your own form of inflation-proofing. Alternatively, you could use this money to clear any remaining debts. State pension Decide whether you need this income immediately - if you defer payment by five years, the government will give you either a lump sum of £30,000 or a higher income later on. Contact the DWP Pensions Service for more information about this. Review your employee benefits. Find out what you are losing (for example: medical or life insurance). If you need to continue these, get quotes for new policies. Some employers negotiate deals with providers so that retiring employees can continue policies at a reduced rate. Get a medical check If you aren't in good health you may be able to get a higher income, depending on your condition. Specialist providers of impaired life annuities include Partnership Assurance, Just Retirement, GE Life, Norwich Union and Prudential. Apply for your annuity or unsecured pension Allow yourself two months to apply for your annuity. Rates are subject to change, and you get the rate available when you retire, not when you apply. There can be delays of several months, particularly if you are buying your annuity from a provider other than your pension provider, so you may want to allow yourself more time so as to ensure you're receiving your income as soon as you retire. Check the FSA website (fsa.gov.uk/tables) for the best rates available, or consult a financial adviser. You will have to sign discharge forms from your pension provider and possibly return your policy documents. You might also have to show proof of your age to your new provider. A financial adviser will be able to chase this process up for you. Gather all your documents You will need a P45 retirement certificate from your employer. Check whether you need anything else, such as medical insurance or life insurance policy documents. Finally, get the champagne out and prepare to enjoy this new chapter of your life. Please see Pre-Budget report
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