According to a survey by Aviva, only 48% of retirees aged between 65 and 75 who don’t pay for financial advice feel confident they won’t run out of money in retirement.
Furthermore, a MoneyWeek report revealed that many retirees could run out of money after just 11 years.
A few years ago, the UK Department for Work and Pensions (DWP) introduced the concept of a “midlife MOT”, aimed at people in the years approaching retirement. The intention was to encourage individuals to proactively think about their financial security in retirement.
The idea behind an MOT is to check your car’s roadworthiness and flag up any important issues that need addressing now, such as worn tyres and faulty brakes. That way, it ensures the parts don’t become a far more serious problem in the near future.
Following this concept, as well as a midlife MOT, we believe there’s a strong case to be made for another financial MOT later in your life, after you have retired.
Your financial planning shouldn’t end when you retire from working
It may be tempting to think you’ve done all the hard work once you stop working and start drawing an income from your accrued wealth.
You may believe that you have sufficient funds to live comfortably, and so there is no further planning required.
However, even though you have passed an important milestone that you have planned extensively for, you will still have important decisions to make. The plans you have will need to be reviewed and adjusted as your retirement progresses.
To extend the analogy of an MOT, the important component of your car is the engine. Without it running smoothly, you will struggle to move forward.
The equivalent when it comes to your financial future is your plan. Is it fit for purpose, or are there changes you need to make?
A retirement MOT can help you address key issues and risks associated with your ongoing retirement finances that you need to be aware of.
Four of the most important that you may want to consider including in your own retirement MOT are:
1. Ensuring your investment strategy is still effective
A key part of your retirement MOT will be to assess your investment portfolio. If your engine is your retirement plan, then your investment strategy is the fuel that keeps it moving.
After you have had some time drawing income from your fund, you will start to have an idea as to the optimum amount you feel you can draw sustainably each year. This will give you some insight into whether you have the right level of investment risk that matches your income requirements and tolerance of market volatility.
It’s important to remember that markets, by their very nature, can be volatile, and that the performance of different sectors and regions does not necessarily align.
This makes it important to rebalance your portfolio to reflect changing market conditions and ensure that it is still fit for purpose in terms of providing the long-term growth you require.
2. Assessing the effect of inflation on your income
Regardless of your age and employment status, inflation will affect the purchasing power of your money.
In simple terms, a year of 5% inflation will mean that you will need £105 to buy now what £100 would have bought you 12 months ago.
The effect of inflation can be particularly impactful if you have stopped working and are no longer earning a salary that is increasing each year. Instead, you are dependent on your accrued wealth to provide you with the income you need to live on.
So, your retirement MOT needs to assess the effect of inflation on your income strategy to ensure your standard of living is not adversely affected by rising prices.
3. Making sure you and your partner do not run out of money
Possibly the biggest threat you face when you retire, and you are reliant on your accrued assets to provide you with sufficient income to live comfortably, is the possibility of outliving your funds.
You have already read how inflation can affect the purchasing power of your money, but a key part of your retirement MOT will be to drill down into the issue of income security in more detail.
According to average longevity data provided by the UK Office for National Statistics, if you are a 70-year old man, you can expect to live to age 86. Meanwhile, for a woman the same age, your average life expectancy is 88. For both, there is a 25% chance of surviving a further six years, to age 92 and 94, respectively.
This means that, if you are 70, your funds could need to provide you with income for a further 20 years or more.
Because of that, your retirement MOT should include close analysis of your spending patterns, and future liabilities. These could include an assessment of any future care requirements you may have.
4. Considering securing an income stream by purchasing an annuity
You will also want to consider the possibility of using some or all of your accrued pension fund to purchase an annuity. This will grant you the security of a guaranteed income for the rest of your life. Importantly, it can also provide you with:
- The option to link your income to inflation so that it goes up each year
- An additional option to provide an ongoing income for your spouse or partner if you pre-decease them.
With pension funds due to become liable for Inheritance Tax from April 2027, using some or all of your fund to purchase an annuity can help reduce your liability.
However, the decision will be driven by your personal circumstances and, as with much of your retirement income planning, we would recommend that you get expert advice before purchasing an annuity in this way.
Your retirement MOT can ensure that you have an effective income strategy in place
As well as your investment and income strategies, your retirement MOT should also consider other issues such as:
- How any recent legislation could affect your tax position
- Any plans you may have to return to Australia if you’re currently an expat in the UK
- Legacy planning issues, such as ensuring your will is up to date and that you have a will for each country in which you have assets.
A thorough and detailed retirement MOT can give you valuable peace of mind and stand you in good stead throughout the remainder of your retirement years.
Get in touch
If you would like to talk about your retirement plans, please get in touch with us.
Please note
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
This article is for information only, it does not take into account your personal objectives, financial situation, or needs. Please do not solely rely on anything you have read in this article and ensure that you conduct your own research to ensure any actions you may take are suitable for your circumstances.
Estate planning and wills are not regulated by the FCA.
All contents are based on our understanding of HMRC legislation, which is subject to change.