Retirement shouldn’t be a time for worrying about money. While you may feel secure in your income, and on top of your finances, hidden costs that we may never have expected can come up to bite us.
To get your prepared, we’ve outlined some of the unexpected costs that can occur during your retirement.
It’s always worth remembering that retirees still do have to pay income tax on their pension income.
Whichever retirement income method you choose – whether it’s an annuity, cash lump sum withdrawal via trivial commutation, or an income drawdown pension – will be paid subject to income tax.
You can reduce your tax payments in a number of ways. First, it is worth considering drawing your retirement income from your ISA savings before touching your pension. Not only are they free of income tax, it allows you to keep your pension invested for potential growth.
Secondly, since the pension freedoms were introduced back in April 2015, more people were set to choose income drawdown to draw more of their money as an income than they could receive from their equivalent annuity rate.
While there is the danger of pushing yourself into a higher income tax bracket by withdrawing too much each year, the flipside to that is that you can also avoid income tax by withdrawing less than £10,600 per year as your income.
Medical and Care Bills
Always be prepared for the financial implications that occur with declining health, as it is an inevitability in old for many. No matter how fit and healthy you feel at the start of your retirement, it could happen, so it’s always worth getting your affairs in order while you still have all of your faculties about you.
Your retirement income could impact greatly on your ability to pay for any treatment or care you may need, so again it is important to decide between an annuity and income drawdown carefully, and with the help of an independent financial advisor.
While certain annuity providers may include protection within your contract to offset care home costs, know that care bills can vary wildly depending on whether you require care at home, or in a residential care centre.
Understand what you are likely to need, and get prepared early to avoid a negative financial situation later in life.
Downsizing your Home
Many retirees find downsizing a common occurrence; your children are likely grown and maintenance and upkeep on a large property can become more difficult or too costly later in life.
While downsizing could leave you financially better off by cutting council tax, energy bills and maintenance costs, you also need to consider the initial costs of the move: Estate agency fees, home surveys, solicitors and removal costs all have to be paid upfront before you’ve accrued any value from your old home, and it’s worth bearing in mind stamp duty and other costs too.
Increased Leisure Time
This one comes down to you and what you want out of retirement. While many look to spend their retirement simply enjoying their time at home, seeing friends and family and generally just being happy to not head off out to work each day, others want adventure, excitement and exploration.
Costs of holidays both abroad and in the UK can start to add up, particularly when you have no additional income to speak of. Eating out, visiting the theatre and socialising all have their associated costs, as does fuel and other transport to actually get out and enjoy these activities, so keeping an eye on your finances is an absolutely necessity, particularly if you chose the income drawdown route, where running out of pension funds is a real possibility.
All that being said, retirement should be the time when you do the things you’ve always wanted to do and never felt able, whether that be due to time constraints, financial reasons or because you felt tied to everyday commitments.
Enjoy your retirement, just make sure you’re thinking about your financial future, too.