Annuities Explained

As you enter retirement it’s important to consider how you will structure your finances to ensure you can live in comfort and, ideally, do everything you have planned.

There are a series of steps you can follow that will help you become more aware of how you are spending your money and ultimately allow you to decide if you need to direct your funds to other areas that may better meet your needs and wants.

Track your income and spending

Before you start planning it’s a good idea to see where your money is coming from and where it’s currently going. One-way you can do this is by reviewing your bank and credit card statements and listing all income (earnings, benefits and any other money coming in) then everything you spend, however small.

Do this for the previous, say, three months and take an average for each category for example food, transport, household expenses (such as mortgage, council tax, water, gas and electricity), insurance, debt repayments, savings, fun (including hobbies, days out), health and beauty (gym memberships, haircuts, opticians bills), clothing and charity donations. If

Next identify annual costs such as home insurance, holidays and spending on big events like Christmas. Divide these costs by twelve and add these to your monthly expenses.If

By now you should have a guide of your income and spending habits on a monthly basis.

Create a retirement budget

The next step is to create a retirement budget that will allow you to achieve the lifestyle you want and that you feel you and your household will be able to stick to.

You can create your budget yourself or use a pension budget planner like the Money Advice Services’ Budget Planning Worksheet which is available as a free PDF. This worksheet has specific sections for pension, annuity and drawdown income as well as pay from work and tax credits making it perfect for those in or close to retirement.

Try to base your budget on guaranteed income like your state pension and any defined benefit pensions or annuity income so you can relax, safe in the knowledge that if you stick to your budget you will be able to afford your lifestyle. If you have a pension pot of over £2,000, before any tax-free cash has been withdrawn, that you would like to use to purchase a guaranteed income in the form of a lifetime annuity you can compare lifetime annuity rates online.

Be honest with yourself and make sure you are realistic about your spending. If you like to order a takeaway once a week put this in your budget and allocate the appropriate funds to each category.

Plan ahead

Within your budget create separate “sinking funds” for larger, irregular expenses such as holidays, birthdays and Christmas. Sinking funds allow you to save a small amount every month for a certain amount of time to spend on a bigger purchase. For example if you know you want to spend £1,000 on a holiday in August and it’s January you would take the cost (£1,000) and divide this by the number of months until you pay for the trip (8 months if you were able to pay the same month you were taking the holiday). This means you would create a sinking fund and contribute £125 to it every month until the payment is made. This sinking fund would be accounted for in your monthly budget along with other sinking funds for large expenses.

Before allocating funds to non-essentials like holidays check that you have enough money to hand to cover any unplanned expenses like a broken washing machine or unexpected car repairs. If you don’t have an emergency fund in place for these occasions prioritise setting one up, you can even create a sinking fund to do this.

Review your spending

You’ve created a retirement budget, now it’s time to see if you can stick to it. Whether you write it down or use an app to keep track be sure to make a note of everything you spend. Then, at the end of the month, check your spending against your budget and see how you’ve done.

It’s also a good idea to keep an eye on your finances throughout the month so you can monitor your progress and adjust your spending to stay on budget.

Highlight areas to change

At the end of the month look at your figures and highlight areas of over and under spend. Are you happy with how your budget looks? Do you need to increase or decrease spend in any of the categories?

Remove costs

Is there anything you can do to remove any of your costs completely? Are there any subscriptions or memberships you no longer use that you could cancel? Perhaps you’re paying for a gym membership despite only going to the gym once or twice? Maybe you’ve got Amazon Prime, Netflix and Sky when one entertainment subscription would suffice? Are there any bigger changes you could make? Do you really need a car, or could you make do with public transport?

Reduce costs

If you have a fixed income it may be crucial to ensure you are getting the best deals and are on the lowest tariffs. Here are some ideas to help you reduce costs:

  • Use online comparison websites to find out if you could get a cheaper deal on your energy, broadband, insurance, breakdown cover and more.
  • Visit sites like Money Saving Expert for advice on how to lower bills, haggle with suppliers and save money.
  • Use tools like My Supermarket to compare the items in your grocery shopping across 14 supermarkets so you can be sure you’re getting the best deals.
  • Check voucher code websites before making purchases online. You could find online discount or free delivery codes that could save you money.
  • Consider making online purchases through cashback sites such as Topcashback or Quidco. These sites offer you a percentage of your purchase as cashback which can be paid into your bank account or converted into vouchers.
  • Enter your postcode on to find the lowest cost petrol in your local area but don’t go too far out of your way to fill up.

Consider areas that you could make a real difference in. Are there things you could borrow instead of buy? For example, could you visit the library instead of purchasing books? Could you reduce the number of branded products you buy and instead purchase supermarkets own brands? If you have more bedrooms than people in your household could you switch to a water meter? Could you eat out once a month instead of every week?

Working through each category and considering if there is anything you can do to reduce or remove costs will help you optimise your budget and give you more money to spend in the areas that really matter to you.

Check your progress

Review your progress every month so you can celebrate your successes and refocus on areas that you’re struggling with. Your retirement budget is a working document that you should return to again and again. If a bill changes be sure to amend your budget and continue to monitor your income and outgoings to keep it up to date.

Enjoy your retirement

Retirement should involve spending time doing the things you love, and creating your budget is the perfect opportunity to focus on your goals and the think about how you really want to spend your time and money. Enjoy the process and if you need help, don’t be afraid to ask! Most financial advisors will be able to offer advice.