PENSIONS
Learn more about pensions. The purpose of a pension is to provide an income for you to live the life you want once you have retired.
No matter how far away you are from retiring, it’s important to plan for the future. It’s hard to know exactly how much you’ll need because everyone has different circumstances and different expectations. Today you have new pension freedoms to decide when and how you retire.
There's no fixed path to retirement or a finite end point.
Everyone has a different journey through life, with their own experiences along the way, and there’s no need for it to become stressful. You can reduce any anxiety by planning how much you’ll need to retire and working out how best to build up your pension pot. The purpose of a pension is to provide an income for you to live the life you want once you have retired. But, due to longer life expectancies, less generous schemes and lack of understanding around saving, a common problem is that some people don’t retire with enough to last them.
Setting retirement goals, what do I need to know?
Providing answers to your planning questions
People who know where they’re going and how to get there feel more confident in their retirement plan. Understanding the below areas is key, speaking with a financial adviser can help you answer these questions:
What do I need to know?:
How much you need to save for retirement
How to save tax-efficiently for retirement
How pensions work
The type of pension you should choose
The right amount to contribute to your pension
How to boost your pension pot
How your pension should be invested
How to withdraw money from your pension
Have you tried our Retirement forecasting tool?
Discover what your current pensions will give you in retirment
Gone are the days of being told to stop working one day and picking up your state or compnay pension the next.
Retirement Options
The pension freedoms have given retirees a whole host of new options. There is no longer a compulsory requirement to purchase an annuity (a guaranteed income for life) when you retire. The introduction of pension freedoms brought about fundamental changes to the way we can access our pension savings. Once you reach 55, you can access your pension pot. You can take some or all of it, to use as you need, or leave it so that it has the potential to continue to grow. When you take your pension, some will be tax-free but the rest will be taxed. The amount taxable will depend on your circumstances, which can change. Tax rules can also change in the future. It’s up to you how you take benefits from your pension pot. You can take your benefits in a number of different ways.
Choosing which method
Choosing which method You’ll need to choose which method you use to do so, with options including buying an annuity (a guaranteed income for life), taking income through flexi-access drawdown, withdrawing lump sums or a combination of all of them. There are advantages and disadvantages to each method, and in some cases your decision is permanent. Which option or combination is right for you will depend on:
Your age and health
When you stop or reduce your work
Whether you have financial dependents
Your income objectives and attitude to risk
The size of your pension pot and other savings
Whether your circumstances are likely to change in the future
Any pension or other savings your spouse or partner has, if relevant
Everybody’s situation is different, so how you combine the options is up to you.
Annuities – guaranteed income for life
Annuities enable you to exchange your pension pot for a guaranteed income for life. They were once the most common pension option to fund retirement. But changes to the pension freedom rules have given savers increased flexibility. You can normally withdraw up to a quarter (25%) of your pot as a one-off tax-free lump sum, then convert the rest into a taxable income for life – an annuity. There are different lifetime annuity options and features to choose from that affect how much income you may receive. You can also choose to provide an income for life for a dependent or other beneficiary after you die. The amount you receive can vary. It depends on how long the provider expects you to live and how many years they’ll have to pay you.
Flexible retirement income – pension drawdown
When it comes to assessing pension options, flexibility is the main attraction offered by income drawdown plans, which allow you to access your money while leaving it invested, meaning your funds can continue to grow. This option normally means you take up to 25% of your pension pot, or of the amount you allocate for drawdown, as a tax-free lump sum, then re-invest the rest into funds designed to provide you with a regular taxable income. You set the income you want, though this might be adjusted periodically depending on the performance of your investments. You need to manage your investments carefully because, unlike a lifetime annuity, your income isn’t guaranteed for life. You may be able to ask your pension provider to invest your pension pot in a flexi-access drawdown fund. If you have a ‘capped’ drawdown fund, you can keep it or ask your pension provider to convert it to flexi-access drawdown.
Small cash sum withdrawals – tax-free
This is an important consideration for those weighing up pension options at age 55, the earliest age at which you can take up to 25% of your pension pot tax-free. You should ask yourself whether you really need the money now. If you can afford to leave it invested until you need it then it has the opportunity to grow further. For each cash withdrawal, the remaining counts as taxable income and there could be charges each time you make a cash withdrawal and/or limits on how many withdrawals you can make each year. With this option, your pension pot isn’t re-invested into new funds specifically chosen to pay you a regular income and it won’t provide for a dependant after you die. There are also more tax implications to consider than with the previous two options. So, if you can, it may make more sense to leave your pension pot to grow so you can enjoy a larger tax-free amount in years to come. Remember, you don’t have to take it all at once – you can take it in several smaller amounts if you prefer.
Combination – mix and match
Of all the pension options, if appropriate to your particular situation, it may suit you better to combine those mentioned above. You might want to use some of your savings to buy an annuity to cover the essentials (rent, mortgage or household bills), with the rest placed in an income drawdown scheme that allows you to decide how much you can afford to withdraw and when. Alternatively, you might want more flexibility in the early years of retirement, and more security in the later years. If that is the case, this may be a good reason to delay buying an annuity until later in life.
The value of retirement planning advice
There will be a number of questions you will need answers to before deciding how to use your pension savings to provide you with an income. These include:
How much income will each of my withdrawals provide me with over time?
Which withdrawal option will best suit my specific needs?
How much money can I safely withdraw if I choose flexi-access drawdown?
How should my savings be invested to provide the income I need?
How can I make sure I don’t end up with a large tax bill?
Busting the myths about pensions
If you are approaching retirement age, it’s important to know your pension is going to finance your future plans and provide the lifestyle you want once you stop working. Pension legislation is extremely complex and it’s not realistic to expect everyone to understand it completely. But, since we all hope to retire one day, it is important to get to grips with some of the basics. Many of us have made pension provision, but some of us don’t know very much about the details. To help you get a handle on some of the myths around pensions, we’ve got answers to some of the things you may have been wondering about. It’s particularly helpful to become aware of the things you may have thought were facts that are actually myths. Here are some examples.
+ Myth: The government pays your pension
Fact: The government pays most UK adults over the pension age a State Pension, which is currently:• Retired post-April 2016 – max (full rate) State Pension of £179.60 a week• Retired pre-April 2016 – max (full rate) basic State Pension of £137.60 a week (a top-up is available for some, called the Additional State Pension) Not everyone is eligible for the full amount, which requires you to have at least 35 qualifying years on your National Insurance record. If you have less than ten qualifying years on your record, you’ll receive nothing. Even if you receive the full amount, you’ll usually need to supplement it with your own pension savings.
+ Myth: Your employer pays your pension
Fact: Most people are automatically enrolled into a workplace pension. Your employer is usually required to pay a minimum of 3% of your salary into it and you must also pay a minimum of 5% of your salary. If you keep your contributions at the minimum level, it might be difficult to save enough for retirement. As life expectancies grow longer, your retirement can be almost as long as your working life. It’s therefore important to put aside a portion of your earnings to create a pension pot that will enable you to receive the income and live the lifestyle you want during retirement.
+ Myth: You can’t save more than your lifetime allowance
Fact: There is a lifetime allowance on the benefits you can access from your pension, which is currently £1,073,100 (tax year 2021/22). That doesn’t mean that you can’t withdraw any more after that, but it does mean that you’ll pay a tax charge of up to 55%. However, there are ways of withdrawing the money with a tax charge of 25%.
+ Myth: Your pension provider’s default fund is suitable for everyone
Fact: Most pension default funds will start out with a high-risk strategy and steadily move your capital into lower-risk nvestments, such as bonds and cash, as you get closer to retirement. This is to reduce volatility in the value of your investments so that you can have a higher degree of confidence in how much you’ll eventually end up with.If you don’t plan to purchase an annuity, you don’t necessarily need to reduce volatility before retirement. You may be leaving some of your money invested for several more decades, in which case a higher risk strategy may be more appropriate.
+ Myth: Annuities are outdate
Fact: There was a time when almost everyone bought an annuity when they retired, and that time has passed because there are now alternative ways to access your pension savings. But annuities still have a useful role for generating a retirement income and can be an appropriate product for some people. Unlike other pension withdrawal methods, such as drawdown, an annuity offers a fixed income for life, so there’s no risk of your money running out. That’s a crucial benefit for many pensioners.
+ Myth: You can’t pass on a pension
Fact: If you’ve used your pension savings to purchase an annuity, the income from this will usually cease when you die. But if you have pension savings that you haven’t used to buy an annuity (for example, if you’ve been taking an income through drawdown), what’s left can be passed on to a loved one.If you die before the age of 75 there will usually be no tax to pay by the beneficiary. Otherwise, they will need to pay Income Tax according to their tax band.
