I’m 62 and getting a divorce – can I still afford to retire in five years?

In our Pensions Crisis Coach series, we aim to help ease your retirement worries. Are you concerned you’re not saving enough for your later years? Do you want to know if you have enough to retire or don’t know how to find your lost pensions? Email us at money@theipaper.com. We’ll seek to get you on the right track with help from some of the best financial experts and advisers in the business. Question: I am 62 years old and in the process of separating from my wife. We have three adult children and in the next 12 months we will be divorced and have sold the family home – my wife does not work. Ideally, I really want to retire within the next five years – possibly even in the next two years. Is this feasible, given my pension assets may be split with my wife? Shorts Alina Khan, The i Paper’s money coach reporter responds: Divorce can be a difficult and complex thing for many people to navigate – especially when it comes to finances. The first step to help was getting a better understanding of your full financial picture. After some back and forth over email, you told me you have £70,000 in cash savings as well as £220,000 sat in ISAs and in unit trusts – a type of investment fund. You also have a final salary pension – a defined benefit plan – which will pay you £22,000 a year once you reach 65. You also have a few defined contribution pension pots that total £230,000. You are mortgage free and your home is worth around £1.5m. Your basic living costs will be around £3,000 per month when you stop work, and you estimate you will need additional discretionary spending for things like holidays and eating out at £2,000 per month. Patrick Haines, financial adviser at Partners Wealth Management, said, based on his estimates, that retiring in two years’ time might be too early for you, particularly if your pensions are to be shared in the divorce. He suggested setting a retirement age of 67 when you will be in receipt of the state pension which makes retiring “more achievable”, but warned you still may need to reduce your discretionary spending. Aside from this, there are a few things you can do to further strengthen your finances before you come to retire. Making use of your allowances Firstly, Haines said it is a good idea to use previous years’ pension allowances to make the most of your final years of work before retiring. When you save into a pension, you benefit from tax relief, which means you don’t pay any income tax on your contributions. However, the government places a cap on the amount you can save while receiving tax relief, set at £60,000 a year – known as the annual allowance. You mention you are an additional-rate taxpayer, set at 45 per cent, therefore you are entitled to more relief – you can claim an extra 25 per cent tax relief made to your personal pensions but only the first 20 per cent of relief is given automatically. The rest must be claimed, usually through self-assessment. Haines said: “We recommend looking back at the past three years and assessing how much unused pension allowance remains. You could then make a single pension payment and claim tax relief at your highest marginal rate on this sum.” Auditing your pensions The second stage of the process is to look at your pensions and investments to ensure these are invested in accordance with your agreed attitude to risk, with any changes being made as necessary. From April next year, pensions will form part of a person’s estate when inheritance tax is calculated, therefore Haines suggested in preparation for your divorce to consolidate as many of your defined contribution pensions as possible to ease the administration process. He added: “You and your wife should apply for a state pension forecast to see if any voluntary contributions should be made to meet any shortfall. “If you were to retire at 67, the state pension would make up most or all your tax-free personal allowance, with the defined benefit pension then being taxed at 20 per cent. Withdrawals from your defined contribution pensions would suffer income tax at your marginal rate.” Given you are getting a divorce, you should also consider your pension nominations and adjust these so that your family can still benefit from your pensions once you pass away. Your defined benefit pension may have certain rules like a former spouse being able to inherit your pension if you pass away if it hasn’t already been shared in the divorce, so Haines recommended looking into the specific rules of your scheme. Bolstering your ISAs He also said your £70,000 sat in cash could be used to further fund your pensions and ISAs as well as build a strong emergency fund. However, it is important to note that from April 2027 you will only be able to put in £12,000 a year into a cash ISA. “You ought to look for a high interest paying savings account for your emergency fund which may attract interest at around 4 per cent before tax. “Alternatively, you could consider NS&I premium bonds which are backed by the government and have recently increased the chances of winning, so increasing the expected yield,” Haines explained. You also mentioned owning some unit trusts and Haines recommended using the “bed and ISA” strategy for ISA funding in retirement. This is basically when your investments are “converted” into tax-free ISAs each year by selling your investments and immediately rebuying them within a stocks and shares ISA. Haines said: “This process will then ensure that more of your retirement income can be paid to you without the deduction of income tax.” You should also consult a solicitor to get a better understanding of how your assets will be divided upon your divorce. They would also be able to prepare a new will for you post-divorce.