A client of mine once told me that selling his business and moving towards retirement was like ‘giving away your train set’.

When you decide to retire, you will face some big decisions. So, it can pay to plan ahead. Putting a plan in place means that, when the time comes to make decisions, you’ll know the answers in advance.

To help you to focus on the financial aspects of retirement, here are seven questions that business owners and executives often ask themselves as they begin their life after work.

• Can I afford to retire?

In my experience, this is the main source of anxiety among senior executives and business owners at the point of retirement.

A better question might be: “Can I afford to maintain my lifestyle into retirement?”

Most people want to continue to live the life they are used to when they retire. Knowing they can do this is a huge step.

If you want the reassurance that you can afford to retire you should create your own financial plan, work out how much your lifestyle will cost, looking at your financial resources, and creating a cash flow projection.

The key point here is: don’t wait for retirement to do this (if you can). Do it as soon as possible.

• When should I start taking my pension?

This depends on the type of pension scheme you’re a member of:

• Defined benefit/final salary – retirement prior to your normal retirement date will be subject to trustee approval and you may incur penalties
• Defined contribution – you can draw down on your pension at age 55 using a flexi-access drawdown plan

If you’re thinking about taking your pension, there are a range of factors to consider:

• Do you need the income right now?
• How is your health? If you are in poor health, you might want to access your pension straight away to enjoy your retirement while you can
• Do you have other sources of income?
• What is my tax position? For example, if you are working and paying higher levels of tax, the tax burden of drawing down on your pension will be greater.

Seeking professional advice to consider your options is highly recommended at this stage.

• Should I take a tax-free lump sum?

Again, this will depend on the type of scheme you are a member of:

• Defined benefit/final salary – you’ll receive a statement with your options. You will need to consider how much income you will give up in exchange for a tax-free lump sum
• Defined contribution – the tax-free lump sum is typically limited to 25% of your pension pot and can be taken as a lump sum or phased over a period of time. You can then use this to buy an annuity or take income through flexi-access drawdown. Essentially, you can choose between a sustainable withdrawal strategy designed to provide you with a lifetime income, or a higher income today that could result in a lower future income.

Remember that, for all pension types, the tax-free cash is limited to 25% of the Lifetime Allowance applicable at the time (higher if you have protected your pension value in previous years).

• Are my current pensions suitable for me as I enter retirement?

This will depend on your individual position as you approach retirement. Taking professional advice at this time can help you to make sense of your options as part of an overall financial plan.

Whatever you’re thinking of doing, make sure you shop around. For example, don’t accept the annuity quote offered by your existing pension provider. Consumer group Which? report that an estimated £1 billion in pension income is lost every year by retirees not shopping around for an annuity.

If you are thinking of choosing flexi-access drawdown, it’s also important to shop around and consider your income requirements.

You may also have other considerations such as:

• Whether to consolidate several defined contribution pensions into one flexi-access drawdown plan
• Whether you defer payments from your final salary scheme beyond your normal retirement date
• Whether to transfer your defined benefit/final salary scheme to a defined contribution scheme. Always take professional advice here as this could be the biggest financial decision of your life.

• Do I need to replace lost benefits?

Once you stop work, there’s a chance that you may also lose other important benefits, from private medical insurance to death-in-service benefits.

Replacing these is a personal decision. Replacing private medical cover can be expensive, particularly if you don’t benefit from a group discount or you’ve had previous claims. So, you might want to self-insure, ringfencing a certain pot of money for medical care.

If you have financial dependents, then you may also wish to replace any lost death-in-service protection with the appropriate life cover.

• Should I still pay into my pension?

If it is affordable, you should consider making pension contributions. Individuals are able to contribute up to 100% of their net relevant earnings, subject to the prevailing Annual Allowance.

Even if you have no net relevant earnings you can still pay in up to £3,600 gross every year, providing income tax relief of £720 for a basic rate taxpayer, £1,440 for a higher rate taxpayer and £1,620 for an additional rate taxpayer. This tax relief is payable until age 75.

If you have already started drawing from your pension, then bear in mind that the Money Purchase Annual Allowance may apply. This restricts the amount you can contribute to your money purchase arrangements without a tax charge applying. In the 2019/20 tax year, this is £4,000.

• Should I use my defined contribution pension or pass it to my kids?

The Pension Freedoms rules that came into force in April 2015 have changed the planning opportunities that pensions provide. For some, pensions have now become a way of transferring wealth to younger generations as well as providing an income in retirement.

Individuals with defined contribution pensions (personal pensions, SIPPs etc.) can now pass 100% of their pension onto a spouse following death, and/or other nominated beneficiaries (such as children). This can be in the form of a lump sum or monies remaining within the pension.

Furthermore, monies held in a pension are not part of a policyholder’s estate, and therefore not liable for Inheritance Tax.

If it is affordable, income in retirement should be met from non-pension assets as these are most likely to be liable to Inheritance Tax. In addition, any pension income withdrawn may not only incur income tax at an individual’s marginal rate, but will also move monies from an Inheritance Tax-free asset into the estate.

Get in touch

If you’re approaching retirement and you’re looking for answers to these or other questions, we can help. Please email info@henwoodcourt.co.uk or call 0121 313 1370.