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I Thought Retiring Would Be So Much Simpler Than It Is!

By Jeremy Ferguson
This article is published on: 12th July 2019

When he announced his remarkable UK pension reforms in 2014, the then Chancellor George Osbourne said:
People who have worked hard and saved hard all of their lives, and done the right thing, should be trusted with their own finances”.

And that’s precisely what people now do. People are using their pension freedoms practically, paying off debts, moving into part time work, and topping up income using flexible drawdown. Some have simply retired, while others may continue working and wait before they start drawing down their pension. The need to purchase an annuity to provide an income for life is no longer there, so although there are increased freedoms, how has it affected those retiring?

People are now realising that managing your pension pot when you retire is not all that straightforward.
A recent study showed that 45% of those aged 50 to 75 are worried that their pension pot will simply not last their retirement. Before the reforms, you took you tax free lump sum, and then an income, which was often guaranteed for life for both you and your partner.

So, in view of all these choices, and with the world ever changing, what has it all meant?
Amazingly, close to 40% of upcoming retirees are still unsure when and how to access their ‘pot’, while many retirees who have accessed their tax free lump sum have paid off some kind of debt or mortgage, and 28% of non retirees who are going to take their lump sum, plan to spend it.

What are people doing with their lump sums when they reach retirement?

What is surprising is how many people simply put the money in a bank account or invest in something else. This is probably being invested with a view to producing additional income going forward.

I think many people’s pension pots are simply not looking like they will produce enough income for the lifestyle they want to lead, or had become accustomed to. Retiring to Spain, the better weather and longer days in winter typically mean people do so much more than they thought they would. Enjoying life that little bit more, however, normally correlates to greater spending!

What are people doing about the fact so much of their wealth is tied up in property when they get to retirement?
With property making up over half of self employed people’s wealth for those aged 50 to 75, this now tends to be another means that people are looking to use to help substitute their income going forward. Interestingly, their employed peers tend to have less of their wealth in property (37%) and more in their pensions (48%), with the rest of their wealth (15%) in various investments. I think this shows a marked difference between how people who ran their own businesses and people who worked for a company differ in their attitude to risk, with the employee typically being more cautious, having ‘tucked away’ more for retirement.

Equity release is much used area to top things up in the UK, but is not available here in Spain and is fraught with downsides, especially if inheritance for your children is something that concerns you.

Many people are downsizing, so for those who sell up and move to Spain, this is a great opportunity to do just that.

On average 30% of people’s retirement income is starting to come from downsizing at retirement.

Pensions Spain

It is becoming more and more important that people plan carefully when reaching retirement, particularly if that involves moving to Spain where different taxation issues also need to be considered.

On this point, many people are unaware that you can get your pension paid gross from the UK when you become tax resident here ( i.e. there is no tax deducted at source). This is done by getting an NT code (Not Taxable) and letting your pension provider know. This will mean your life will be simpler when filing your Spanish tax returns, and in some cases people are even able to reclaim any overpaid taxes here for up to 4 years.

What else are people doing in retirement?
There is an ever growing army of ‘Silver Entrepreneurs’, with retirees regularly consulting for their old employers, starting up new businesses, or simply getting back into part time work. The reasons vary, but again, it just shows how much the retirement model is changing.

I know I will inherit some money by the time I retire, so this will help.

Although this is often the case, those of us receiving inheritance nowadays has dropped from 29% to just 19%. This is almost certainly an effect of people living longer and using their property to support the increased financial strain of retirement, effectively leaving less behind.

Moving to Spain and Wealth Tax

So what does all of this mean?
Retiring nowadays and managing your finances is becoming a much more involved area. In the past you took your lump sum, looked at the income you would get, adjusted your lifestyle accordingly, and typically assumed you would leave your house to the children.

Nowadays, doctors seem to keep us going for an eternity, things are getting ever more expensive, interest rates are nothing, and the list goes on. Attention and careful planning are needed more than ever to keep an eye on how things are going financially, keeping that balance between sensible expenditure and maximising what you can leave behind to your loved ones.

Tips when hitting retirement :

1. Make sure you have a clear understanding of your outgoings. Assume they will go up every year just simply as a result of inflation. Consider increased care costs as you get older.
2. Have you forgotten a ‘small’ pension you may have had when you worked somewhere many moons ago? Look into it, I’ve had many clients who have been pleasantly surprised.
3. Make sure your UK state pension is fully funded ( you can go online and check that at /check-state-pension).
4. Consider the need to take a lump sum or not. Is a higher income level going to be better?
5. What other investments do you have? Can they be used to produce additional income?
6. Are you paying too much tax on your pensions when you take them here in Spain?
7. Have you discussed inheritance with your heirs?

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Article by Jeremy Ferguson

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