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Money Week
Managing your money in retirement - 5 golden rules to follow to avoid a shortfall
By Kalpana Fitzpatrick,
1 day ago
Retirement overspenders are rising with a fifth of Brits saying they are spending more money in retirement than they had planned for, research shows.
PensionBee found that the high cost of living environment has escalated this for many, with 11% saying their overspending started fairly early on in retirement and could mean they face a pensions shortfall. Helping younger family members also added to their costs.
Becky O’Connor , director of public affairs, PensionBee, commented: “Overspending in retirement is a real risk. It can be hard to know how much you are likely to spend. With living and home maintenance costs often exceeding expectations, a significant chunk of today’s retirees are overspending.”
While good retirement planning, such as adopting the 4% pension rule , can help ensure you have enough to retire on and manage unexpected costs, a cash management strategy can also help make sure your funds do not run dry, while avoiding any shocks or nasty surprises.
How to manage your tax-free pension money
You can take up to 25% of your pension pot tax-free , but before you withdraw the cash, it is a good idea to put some measures in place. This includes:
Building emergency savings that cover 1 - 3 years of your essential spending. According to financial services firm Hargreaves Lansdown , for the average person aged 60 or over, this is between £16,680 and £50,040.
Making a plan to avoid spending it frivolously. Remember, if you do not need the cash immediately, then there is no obligation to take the lump sum immediately or even all at once.
Thinking about what income you may need later on in your retirement. You can either opt to buy an annuity or consider drawdown , but the more cash you take now, the lower your ongoing income will be.
Protecting your money from IHT , too. Money in a pension is not subject to IHT, so if you do not need the cash immediately, keeping it in your pension pot makes good sense.
Sarah Coles , head of personal finance at Hargreaves Lansdown, comments: “Your cash savings may not get much of a look-in during retirement planning: they tend to play second fiddle to your pension. However, if you’re not careful, there are five horrible mistakes you can wander into, so it’s worth knowing what you need, how you’re going to build the kind of nest egg that will protect you as you get older, and the best way to ensure it’s put to good use."
According to the latest figures from the Pensions and Lifetime Savings Association (PLSA), if you are looking for the bare minimum in retirement, you will need at least £14,000 a year as a single person or £22,000 as a couple, on average. This will cover your basic needs, with a little money potentially left over for entertainment.
For a moderate lifestyle, the PLSA estimates you need £31,000 as a single person or £43,000 as a couple. This allows you to cover your needs, leaving a little extra for foreign holidays and eating out.
For a comfortable retirement, the body suggests an average pension income of £43,000 if you’re single or £59,000 for a couple. This level will allow you to be spontaneous with your spending and give you more to enjoy things like holidays, mini-breaks, eating out or even treating the grandchildren.
Some research even suggests people may need to accumulate a pension pot of £1 million to retire comfortably , taking into account housing costs and living costs which are still high for many households.
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