Make sure you plan for retirement - it could come sooner than expected.
WHEN DO you expect to retire? If asked, most of us would probably hope to stop work at 55 or so, while conceding that financial necessity might force us to work until 60 or even 65.

In fact, the average age men are retiring at is now around 57, despite the "official" mark remaining 65. For women it is even earlier. For many, "early retirement" is a euphemism for redundancy.

The average 57-year-old man can expect to live at least another 20 years. Put another way, if a new retiree had started work at 17, what they managed to save in 40 years must last them at least 20 years, perhaps much longer.

As only one in 10 pensioners has a total income of pounds 30,000 a year or more, many will find that they will not have the income to spend in the way that they would like, especially if travel and expensive hobbies are part of retirement plans.

So what steps are there to consider if you are approaching retirement - perhaps faster than you thought necessary?

Some people look to retire gradually by switching from a management to a consultancy role, perhaps working two or three days a week, according to the Bristol-based independent financial adviser Roddy Kohn, of Kohn Cougar.

There are good reasons for such an option. Annuity rates for the under- 60s are, says Kohn, "awful", while, if their consultant's fees are enough to live on, their pension fund can continue to work while they look to cut down. However, annuity rates have fallen sharply and could fall further if a single European currency becomes a reality for the UK.

Those offered early retirement need to beware too of any penalties for retiring early. It is not unusual for a company scheme to reduce the pension payable by 6 per cent for each year before normal retirement date. Because final-salary schemes base a pension on income during the last few years, a reduced income can have a heavy price.

Roddy Kohn argues that the Government must act to prevent the very real scandal of millions of people retiring on an income way below what they expected, simply because Government policy has led to lower long-term interest rates. Even if employers are happy to continue to offer pension benefits linked to final salary, the cost to employers of offering any pension scheme will rocket out of control.

Retirement can change financial priorities. For example, death-in- service life cover will be lost. However, as most retirees' children will be grown up and their partner protected by a widows or widowers pension, the need for life cover is only there for those with a significant inheritance tax (IHT) liability, says James Bruce, of Corporate & Personal Planning Limited, in Colchester.

IHT is payable at 40 per cent on estates valued at over pounds 223,000. Many pensions allow part of the pension to be taken as a cash lump sum. Even if the aim is to maximise income by buying an annuity, it makes sense to take as much cash as possible because a purchased life annuity (one bought with cash) is treated more favourably for tax purposes than a compulsory annuity (one bought from a pension fund).

Up to 25 per cent of a personal pension fund can be taken as cash, up to one and a half times final salary from a company scheme.

Roddy Kohn warns against choosing an annuity from your personal pension provider. Modern schemes will let you shop around and, just because a pension plan has given a good return over the years, this does not mean that their annuity rates will also be good.

John Jory, the insurance manager at B&CE, which specialises in policies for the building trade, adds: "Everyone retiring needs to know that they are not obliged to buy an annuity from their pension provider. They can and should shop around. Rates can vary by as much as 25 per cent."

In the run-up to retirement, anyone with a personal pension plan should consider carefully where his or her money is invested. "The aim is to crystallise the gains and reduce the risk of exposure to volatile markets," says James Bruce.

Corporate & Personal Planning: 01206 853888; Kohn Cougar: 0117 971 1177; B&CE Insurance: 0345 714714

The writer is publishing editor of HealthCare Insurance Report