While starting retirement may seem a time to be cautious about splashing out, there are some big outlays that may make sense and save you money later on. Conversely, you may want to set money aside in earlier retirement to help you cope with spending later on, particularly inflation and possible care costs.
Many people have the option to take a tax-free lump sum from a pension scheme as they start retirement (see Chapter 3), making this an ideal time to consider some big-ticket items like making home improvements, buying a car and paying off debts.
Home improvements
If you plan to remain in the same property, would making some changes or improvements be sensible now either to reduce your bills later on or make your home more age-friendly? These could include installing double glaz-ing, insulating the loft, modernizing the kitchen, installing a downstairs shower room or converting part of the house to a granny flat. You might also decide now is a good time to switch to more environmentally friendly forms of heating – you can find out more about that in Chapter 6.
If you think you might move in the next few years, be aware that you might not recoup the cost of any improvements you’ve made. In a survey by NAEA Propertymark, estate agents reckoned those most likely to add value are a loft conversion to create an extra bedroom or a new kitchen.
Purchasing a car
There are a variety of reasons why you might be thinking about buying a car now. For example, while in work you may have had a company car, or you might want something smaller and more economical if you will no longer be commuting.
Company car owners should first check whether they are entitled to purchase their present car on favourable terms. A number of employers are quite happy to allow this.
A complication is whether to stick with traditional fuel or make the switch to an electric car. The government is committed to phasing out the sale of new petrol and diesel cars by 2030. But, for now, electric and hybrid cars are costly to buy, although usually cheaper to run. However, a survey by Ford Motors found lack of charging points was putting off half of UK buyers and, because of that shortage, some local authorities have started fining people who stay too long at public charging points. So, on cost grounds, you might decide it’s worth hanging on to your existing car a bit longer until the electric market is better developed.
Electric vehicles are greener to run, but that is offset to some extent by the carbon emissions involved in making the cars. Studies suggest that taking all factors into account, after about 20,000 to 25,000 miles of driving, switching to an electric car is the greener option.
Paying off credit cards and loans
This is, generally speaking, a good idea, since delay is unlikely to save you money. However, one precaution is to check the small print of your agree-ment for any charge on early repayment, which is common with fixed-term personal loans. Similarly, if you have a mortgage, particularly one with a fixed or discounted interest rate, there may be a charge for paying off the mortgage before the period of the special deal has finished. So you may want to hold off paying it off for a while. After that, there is normally just a ‘sealing fee’ (also called a ‘deeds fee’) to cover the lender’s legal costs involved in the mortgage coming to an end. At this point, you’ll receive any deeds to your property that your lender had in its keeping. If your ownership of the property is recorded in the Land Registry, you might think the deeds are unimportant. However, they often contain additional information that is not held by the Land Registry, such as covenants about how the property may be used, who is responsible for boundaries and so on. So keep your deeds in a safe place.
Inflation
Some of your retirement income may increase each year in line with infla-tion – for example, your State Pension and some company pension schemes (Chapter 3 has details). However, if you will be relying for at least part of your income on sources that are not inflation-proofed, you need to decide how you will maintain your standard of living over the years as prices rise.
One option is to carry on saving during the early years of retirement so that you can gradually draw on this pot of money later on. Chapter 5 has suggestions on where to save and invest.
Care
Increasingly, people are fit and well when they reach retirement and with luck that will continue for a long time. However, the reality is that the chance of developing health conditions does increase with age.
A government report estimated that around 1 in 10 people now aged will face future long-term care costs of more than £100,000. On the other hand, a quarter of this age group will end up spending little or nothing on care. It is a total lottery and you have no real way of knowing if you will be one of the lucky ones. The government has announced changes that will help to protect people from catastrophic care costs, but you could still end up paying a lot. The start date for these changes keeps being delayed, and is now October 2025. Therefore, it makes sense to plan ahead for how you might meet care costs later on if the worst does happen. Your plan might be to set aside some savings now, or perhaps sell your home or use equity release to fund care. There is more information in Chapters 6 and 14.
Money if you are made redundant
We live in uncertain times and many people fear being made redundant. Much of the information in the earlier part of this chapter is equally valid whether you become redundant or retire in the normal way. However, there are several key points with regard to redundancy that it could be to your advantage to check.
From your employment
YOU MAY BE ENTITLED TO STATUTORY REDUNDANCY PAY
Your employer is obliged to pay the legal minimum, which is calculated on your age, length of service and weekly pay. To qualify, you will need to have worked for the organization for at least two years, with no age restriction. Redundancy pay is 1.5 weeks’ pay for each year worked if you are 41 or older, based on pay up to a maximum of £643 a week (£669 in Northern Ireland) in 2023/24 and a maximum of 20 years. There is a calculator on GOV.UK to help you work out your entitlement: Calculate your statutory redundancy pay (Directory, p 45).
EX GRATIA PAYMENTS
Many employers are prepared to be more generous and will pay you more than just the statutory amount. As long as it’s not more than £30,000, redundancy pay is not taxable. Any payment over this limit is subject to income tax. Redundancy pay means genuine compensation for loss of your job. It does not include, for example, pay in lieu of notice or holiday pay, which will be taxed just like any other earnings (see Chapter 4).
BENEFITS THAT ARE NOT PART OF YOUR PAY
Redundancy may mean the loss of several valuable benefits such as a company car, life assurance and health insurance. Your employer might agree to include your company car as part of your redundancy pay. Some insurance companies allow preferential rates to individuals who were previ-ously insured with them under a company scheme.
HOLIDAY ENTITLEMENT
You could be owed holiday entitlement, for which you should be paid.
WORKPLACE PENSION
There are different types of workplace pension. If yours is a personal pension (see Chapter 3), it will continue even though you leave your employer, though any contributions your employer was paying into it on your behalf will stop and your own contributions can of course no longer be deducted direct from your pay packet. Contact your pension provider if you want to arrange another way to pay into it.
If you belong to a company pension, you will cease to be an active member when you leave, but will usually have what is called a ‘deferred pension’ that you will be able to claim when you reach retirement. However, if you are already close to retiring, your employer might offer an early or enhanced pension to encourage employees to opt for voluntary redundancy. Check the redundancy terms being offered with your firm’s human resources department.
Your mortgage
If you have a mortgage and are worried about keeping up the repayments, you should contact your mortgage lender as soon as possible. It may agree to a more flexible repayment system and, if you do fall into arrears, must explore ways to help you pay – this is called the Pre-Action Protocol for Possession Claims based on Mortgage or Home Purchase Plan Arrears in Respect of Residential Property (Directory, p 17). Repossession of your home must be treated by your lender as the last resort.
Check whether your mortgage package includes insurance against redun-dancy. Called Mortgage Payment Protection Insurance (MPPI), this will typically cover your mortgage interest (but not capital) payments for a maximum of one, occasionally two, years. You might be eligible for a state loan to help with your mortgage interest payments – see Help with a mortgage earlier in this chapter.
Other creditors/debts
Any creditors that you may have difficulty in paying (electricity, gas, a bank overdraft) should be informed as early as possible in the hope of agreeing easier payment terms. There could be an argument for paying off credit card bills immediately, even if this means using some of your redundancy pay (since the interest on the card is likely to be higher than the return you could get by putting the redundancy pay into a savings account or investments).
‘Signing on’
Even if you are hoping to get another job very soon, you should register as unemployed with Jobcentre Plus without delay. This will ensure that you get National Insurance credits (see Chapter 3). This is important to protect your State Pension. You may also be eligible to claim Jobseeker’s Allowance (see earlier in this chapter).
Further information about redundancy
MoneyHelper publishes a useful online guide to all aspects of redundancy online and as a printed guide which you can download or order (Directory, p 45). Another useful agency is Citizens Advice (Directory, p 2).
More money information
If you enjoy browsing the internet and this chapter has whetted your appe-tite for research on the matter of retirement planning, the following websites cover a broad range of topics relating to your finances and retirement:
- Citizens Advice (Directory, p 2)
- Financing Retirement (Directory, p 9)
- Low Incomes Tax Reform Group (Directory, p 36)
- MoneyHelper (Directory, p 31)
- MoneyWeek (Directory, p 31)
- This is MONEY (Directory, p 31)
- Which? (Directory, p 31)