Fergus Muirhead answers your consumer questions
I'm Fergus Muirhead and I'm here to answer any questions you may have about any money or consumer issues.
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Q. I am 61 years old and thinking about early retirement and possibly working part-time. I am not sure if I can afford to give up full-time work. I work in joinery sales and I am finding it more difficult to handle the stress. I have been paying into a few private pensions for approximately 20 years. My wife is 56 and gave up work last year to look after her elderly father. She has never claimed any benefit for herself in the past year, her father is now in residential care and my wife has now decided to look after our small grandchild to allow our daughter to work. She also has a couple of pensions. We have a joint bank account, and some savings, I have a small ISA, my wife has a share ISA and we have a joint unit bond saver. I am seeking advice that will help me decide if I can afford to retire.
A. I've decided to answer this one question this week because it raises so many supplementary issues that it deserves a page all to itself. The question of when to retire, and how to structure your finances when you do retire is one that will occupy most of us at some point in the future - distant or otherwise! You gave me no figures in your question so I'll answer in the abstract. You and your wife are both still very young, and so any decisions you make are likely to have to last you for a long time, so they have to be properly thought through - and by that I mean that you can't just say "I don't like my job so I'm off!" The starting point for any analysis on whether you can afford to retire is a look at how much money you currently spend. To do that you both need to sit down and come up with an annual budget. Start with your day-to-day spending - keep an accurate note of everything you spend for a whole month. And I mean everything. Newspapers and coffee on the way to work, sandwiches and coffee at lunchtime and a beer or glass of wine on the way home at night. Then add in all of your regular monthly direct debits - mortgage or rent, council tax, insurances, car costs including petrol, utility bills, food etc. Then don't forget to include all of the expenditure that only comes once or twice a year - Christmas presents, holidays and the like. Once you have added up all of these figures you should have a total expenditure for a year.
And now it's time for the other side of the coin - income. If you are both retiring then you need to ask your pension providers for up-to-date statements and then look at what your pensions are likely to give you as an income. You also need to decide how best to take an income from your pension. Do you need cash to pay off any loans or debt? In which case you might want to take as much tax-free cash as possible from your pension, usually up to 25% of the value of the fund can be taken as cash. The rest can usually either be used to buy an annuity (an income for life that will depend on your age, the value of your pension fund, and annuity rates payable at the time) or to provide an income via what is known as 'drawdown'. Which option is better for you will depend on the amount of money in your fund and the amount of investment risk that you feel comfortable with and if you and your wife each have a number of pensions then it might make sense to take advice from an Independent Financial Adviser with experience in the pension market. If you decide to purchase an annuity then you should remember that you can purchase your annuity from any company on the market and not just the company that your current pension fund is with, so again you may need to take advice to help seek out the best rates.
You will now have a figure for your pension income and you now need to compare the two. Is your income figure higher than your expenditure, or is it the other way round? If the income figure is higher then you should be ready to retire! If not you may need to find a part-time job to make up the difference, at least until such time as your state pensions kick in. Of course you have other savings as well in the bank, in the bond and as ISAs so you need to figure out how best to use them. You could invest them to produce an income or you could just eat into the capital every year to help make up any difference between income and expenditure. You might, instead, prefer to keep them on tap as an emergency fund to help cope with any unpredicted expenditure.
If you still have a bit of a gap between the money you spend and your pension income then you could, as you rightly suggest, do a bit of part-time work. The fact that you have bought an annuity, or are taking an income from, your pension, doesn't mean that you have to stop work. Pensions have become a lot more flexible in recent years and so it is possible to be taking an income from a pension and earning an income from part-time work. It is also possible to be paying part of that income into another pension, although that might not be relevant for you.
And the other consideration that has to be at the front of your mind when considering all of the above is tax. You need to make sure that you arrange your affairs in as tax-efficient a way as possible and again you may need to take advice on the best way to achieve this.
Of course the decision to retire is not always all about the money. Sure, you need to know that you have enough money to survive, or more than survive, week to week, but you also need to know what you are going to do with all of the spare time you have every day, week and month. So my last piece of advice would be to take your time and not rush into anything just because you are stressed in your current job. Make sure that the decision to retire is considered and well-thought out, and if you decide to do it then enjoy!