5 finance questions to ask yourself before you retire

Retirement opens doors to exciting prospects like travel, hobbies and more quality time with loved ones, but thinking about all the financial decisions around it can feel overwhelming.

In the lead-up to giving up work for good, questions around pension pots, annuities and tax become increasingly important and tackling these less-exciting details now will enable you to enjoy the fun stuff later without the added stress.

To help make the transition smoother, we enlisted the help of Robert Cochran, retirement expert at Scottish Widows, who has outlined five essential financial questions to ask yourself before stepping into this next chapter of life…

1. Should I combine my pension pots?

“Track down any lost pensions by using the government’s pension tracing tool and consider if you should combine them into one so it’s easier to manage – it could save you money too,” says Cochran. “I would also recommend visiting Pension Wise, the government’s free service for over 55s.”

2. How much state pension am I entitled to and when is it due to kick in?

“Look at when your state pension is due to come in and how much you’re on track to get,” advises Cochran. “The HMRC app is really good for this. It tells you on the homepage when your pension is due to start, and what you’re on track to get.”

3. What type of retirement lifestyle can I realistically expect?

“The Pensions and Lifetime Savings Association (now called Pensions UK) created something called the three retirement living standards profiles – minimum, moderate and comfortable – and they’re based on expenditure in retirement,” explains Cochran. “It takes into account factors like how frequently you are going to replace your car, the type of holidays you want to go on, broadband costs and how much you spend on presents.

“These standards have been set on an individual level and a couple level, and are much more achievable on a couple level.”

“There are various different tools on the Pensions UK website where you can pick the kind of retirement that you want and then see which one you’re actually on track for,” says Cochran.

4. Do I know the tax implications of retiring?

There are a number of different ways you can access your pension savings, and there are tax implications for each of these.

“One of the most common mistakes people make is not thinking about tax enough,” says Cochran. “Since pension freedom has been introduced, people have been accessing their money earlier and have been taking out lump sums of money more often.

“Most people accessing their pension at 55 years old will be able to take 25% of their pension tax-free, but if you take it out as income all in one go you maximise the tax you have to pay. So, I would strongly encourage people to know what the tax implications are before they start taking any money out.”

5. Do I want a pension annuity? If so, what type?

“An annuity is a guaranteed income for life and it’s an irreversible decision. So, once you make that decision, you’ve got to stick by it,” highlights Cochran. “There are a whole host of different types of annuity with all kind of guarantees but one of the most popular, which pays the highest levels of income, will be on a single life basis with no guarantees.”

Despite the popularity of this, Cochran stresses that it’s not necessarily always the best type to get, particularly if you’re in a couple.

“This is because on average women live longer than men and men traditionally have bigger pension pots, so if a man goes and takes out a single basis annuity for the highest possible income he can get with no guarantees, when he dies his spouse will get nothing from that fund,” says Cochran.

“So it’s particularly important for couples to talk to each other about this. Are you willing to forgo what is usually a really small amount of initial income to have a guarantee of an income for your loved one upon the death of the first spouse?”