Many of us dream of the day when we finish work and can enjoy travelling to new places and visiting our favourite holiday haunts.
Whatever your holiday plans may be come retirement, it’s important to make the most of your income options so you can afford to live out your travel dreams to the full!
Here are six of the most popular ways to fund retirement travel:
1. Pension Lump Sum
The government’s Pension Freedoms legislation, introduced in April 2015, allows people in a defined contribution retirement scheme to take a lump sum from their pension at the age of 55.
25% of a lump sum withdrawal is tax free. You can choose to take 25% of your pension fund out in one go, which can be handy if you’re looking to buy a villa or share in a holiday home overseas. Alternatively, you can choose to take several lump sums from your pension fund over several years, the first 25% of each lump sum is usually tax free.
Pensions regulations and funds have changed significantly in recent years so we recommend speaking with an Independent Financial Adviser (IFA) to help clarify the best option for your situation. The adviser will also offer an independent view on whether your current pension fund is competitive in terms of both charges and performance.
You can find a list of the Top 5 client-rated independent financial advisers (IFAs) near you using VouchedFor, which is the UK’s largest review site for independent financial advisers, mortgage brokers and accountants.
2. Pension Drawdown
Separately or additionally to a pension lump sum, taking a regular income (drawdown) from your pension pot is a popular option, especially if you want enough cash to fund a few weeks travel here and there throughout the year.
Income drawdown works by leaving all or some of your pension pot invested and then ‘drawing down’ an income from it. Like the lump sum route, you have to be aged 55 or over and have a defined contribution pension to qualify.
There are two main types of income drawdown product:
Flexi-access drawdown – this was introduced from April 2015, as the name suggests it involves no limit to the income you can draw from your pension.
Capped drawdown – only available before 6 April 2015, it limits the income you can draw down. If you are in one of these schemes it’s important to swot up on the new rules about tax relief on your future pension pot if you exceed your cap.
N.B. because your money is staying invested (usually in the stock market), your pension fund and income can fall as well as rise in value.
If you speak to an IFA, they can advise as to the right drawdown arrangement for you so that you are not eating into more of your pension capital than you want or need to. They can also help scenario model this course of action versus the lump sum route or versus a bit of both.
3. Purchasing an Annuity
Annuities enable you to convert some or all of your pension fund into a guaranteed income for the rest of your life. They have become less popular since the pension freedoms were introduced in April 2015.
Annuities can be complicated so it’s important that you do your homework and get a deal that offers you better value than accessing your pension in other ways. It’s also important to consider the inheritance tax implications of purchasing an annuity, as they tend to be less tax efficient than pensions.
4. Equity Release
With the mortgage paid off and property prices at all-time highs, you could now be sitting on a valuable asset that could help fund your travel plans.
Equity release is a range of products that let you access the cash (or equity) tied up in your home if you are over the age of 55. You can take the money you release as a lump sum, in several smaller amounts or as a combination of both.
It’s not right for everyone and will mean a smaller inheritance for your children, because in basic terms you’ll be borrowing against the value of your home.
The amount you can borrow will depend on your age and health, but if you want to find out if this could work for you, and how much you could borrow, it’s worth speaking to an Independent Financial Adviser.
5. Renting out your home
Renting out your home in the UK to fund your travels is another option.
The rental income may be a great help, but who’s going to authorise repairs, make the regular checks on the property or chase the tenant if payment is late?
You can of course pay an agent to do this for you (but would need to budget for their cost) or rely on a friend or family member.
6. Being smart with the exchange rate
If buying property abroad you should consider protecting yourself against exchange rate fluctuations when making payment(s) in a foreign currency.
By using a specialist foreign exchange provider you’ll be able to minimise your risk of losing out if exchange rates plummet, it could save you hundreds of pounds, particularly if you have a large one-off transaction to make.
Also, if you’re spending a bigger slice of your time outside the UK then it makes sense to sign up for a debit card, credit card or prepaid travel card with low fees for spending and drawing cash overseas. You could also consider moving your investments to assets with less exposure to Sterling fluctuations but always seek professional advice.
Whilst financial planning may be considered a bit dry by many, spending a bit of time on it as you approach or begin your retirement can help you maximise your income and live out your retirement dreams with complete peace of mind.
VouchedFor is the UK’s largest rating and review site in the UK for independent financial advisers, mortgage advisers, accountants and solicitors. Think ‘TripAdvisor’ but for professional advisers!
If you want help demystifying your tax, income or capital options in retirement, simply enter your postcode into the site and see a list of the top 5 rated advisers near you. You can browse their client reviews (which have each been verified) and, if you like the look of one, submit an enquiry. Most of the advisers on VouchedFor offer a free initial consultation to establish how they can help.
If websites aren’t for you, then you can call VouchedFor directly on 0800 047 6468 and they can talk you through the best rated advisers near you.