How to afford retirement

Raiding the cookie jar is not always enough

- Pensions tips and tools
- Pensions Time Machine
- Get independent financial advice

Hopefully, by the time we all reach retirement, we will have more to show for our years in employment than a carriage clock and a basic State pension.

The basic State pension is no longer linked to earnings so those who rely solely on it will find money in retirement a little tight to say the least.

Pensions

Those who have sensibly invested for their retirement have the option to take a lump sum from their pension pot and use the rest to purchase an annuity which will provide them with a regular income over the coming years.

Many private pension plans now allow you to draw your benefits at the time you wish to retire but do not force you to purchase an annuity.

Your income is provided by making withdrawals directly from the pension fund which remains invested. Under current rules you can defer the purchase of an annuity until the time you reach age 75.

Time to take stock

For those with existing investments outside of a pension, it makes perfect sense to reappraise how this money is invested prior to retirement and then afterwards.

In the years running up to retirement it is advisable to lower the risk of the investments you hold.

While investing in Latin America and Japan may have done you proud in the past, they are volatile markets and not the sort of places you want to risk your money when you are no longer drawing a salaried income.

The best course of action is to sit down with an IFA and rework your ISA or fund portfolio - perhaps switch from equities to bonds or other lower risk investments with the emphasis now on income producing rather than capital growth.

Income from an investment portfolio could be the ideal supplement to a pension income that is leaving you a little stretched.

Carry on working

If your pension income is not sufficient, there is always the option to carry on working. Of course, if you do choose to work during retirement, there are a number of financial considerations to take into account. You'll probably be earning less than your pre-retirement salary, so you will need to consider whether to buy an annuity take some money from your pension. Everyone is now entitled to take 25% of their pension fund tax-free cash when they retire. It might make sense to take the tax-free cash - and not draw on their pension, because it creates a great deal of flexibility in retirement.

The tax-free cash to boost your reduced income and leave the remainder invested for further growth. Also, while you have earnings, it is possible to make further contributions based on that income to boost your pension even more. Another method of supplementing your earnings is by taking income drawdown - a means of accessing an income from your pension pot while leaving the rest invested

Equity release

Another method of freeing up cash in retirement is through equity release schemes. An insurance company agrees to pay a lump sum based on the value of the property you own - in return the homeowners agrees that this amount will be reimbursed to the insurance company when the property is finally sold - usually after the death of both spouses.

These schemes are not always popular but they do have the advantage of providing cash for retired couples without them having to downsize or leave their family home.

Inheritance tax

With property prices soaring in recent years, thousands more are finding themselves in the inheritance tax net.

Even though in the last Budget the chancellor agreed to raise the IHT threshold to £300,000, with the value of so many modest properties far exceeding this figure, IHT remains a worry.

There is no inheritance tax paid on property or assets when they are passed on to a survinging spouse. For all other family though, there are ways to mitigage the inheritance tax bill. Most gifts made more than seven years before your death are exempt but it it is well worth talking to a tax adviser if you are likely to face a hefty IHT bill.

Making a will

If you haven't made a will already or updated it over the years, now is the time to do it. Without a will, property or assets could pass to an estranged wife rather than a current partner also step children have no inheritance rights unless specified in a will. A water-tight will is well worth the few hundred pounds it costs.

Checklist

• Check all investments - ISAs, Peps, premium bonds etc and also factor in pension income. Work out how better/worse off you are after retirement
• Have your house valued - always useful to know if downsizing and freeing up cash is an option
• If you are going to carry on working (part-time or otherwise) check how this will affect your benefits or income tax
• If equity release or downsizing is an issue discuss all options with the whole family and ideally an IFA

Work out if you are likely to slip into the inheritance tax net and plan ahead to reduce any potential bill.