When you retire will depend on your circumstances, but being prepared is what matters.
As we go through life and jobs, we tend to collect a few pension pots along the way. If you haven’t already, it is advisable to review all of your pension savings so that you can accurately assess your current situation.
As you get closer to retirement you should review your provisions at least annually to ensure that you are on track to meet your income needs when you’re no longer working. As the financial crisis has shown, so much can change very quickly so it is important to know exactly where you stand.
Boost your pension savings
With 10-15 years to go before retirement you may want to think about boosting your pension savings to ensure you have as much income as possible when you retire.
This is the time to start being realistic: how much income you are going to need in retirement and are you on track to save enough to achieve it? If the answer is no, you have two main options:
- 1. Start paying more into your pension now
This can make a drastic difference to your pot’s value because of the obvious tax benefits of pension contributions. Careful budgeting and planning should mean you are able to increase your contributions.
- 2. Defer retirement
This is becoming an increasingly popular option as life expectancies rise and more people continue to work beyond the state pension age. Delaying gives you more time to accumulate funds and grow your pension pot. Retiring later could also mean you secure a higher annuity rate. However, it is also important to understand that investment returns could be poor and annuity rates could fall during any period of deferment.
Maximise your state pension
While the state pension currently stands at £110.15 a week, it all adds up when it comes to your retirement income.
To qualify for the full basic state pension you need to have completed at least 30 qualifying years of national insurance contributions. If you have fewer qualifying years your pension entitlement will be proportionally lower but you may be able to make voluntary contributions to top-up your payments and raise your state pension allowance.
The closer you get to retirement the more risk averse you are likely to become. Many people restructure their investments as they approach retirement, moving more into cash and fixed interest securities and away from higher risk investments such as equities.
We can help you to evaluate and, if appropriate, restructure your portfolio. Please get in touch to find out more.
Your options at retirement
Choosing how to convert your pension fund into a retirement income is one of the most important financial decisions you will make. You could be in retirement for 20-30 years, or more, so you need to ensure the option you choose will work for you.
Since 2011 there has been no upper age limit for buying an annuity. You previously had to buy an annuity by age 75 but you can now defer for as long as you like.
The cash lump sum
When you retire you will normally be given the option of taking a tax-free lump sum that can be spent or invested how you like. The amount you can normally take is 25 per cent of the value of your total pension fund. You can re-invest this cash into other investments such as ISAs and mutual funds if you wish, but you cannot reinvest it into another pension arrangement. Speak to your financial adviser who will be able to help.
The most common way to convert a pension fund into retirement income is with a lifetime annuity. These are relatively simple and agree to pay you an income for the rest of your life. The level of income you receive will vary depending on a number of factors, including your age health.
Because annuity rates can vary so much it is important that you use your open market option, which gives you the right to shop around for an annuity. Your pension provider won’t necessarily offer the best rate.
It is also important to check whether you are entitled to an enhanced annuity due to any health conditions or lifestyle characteristics, such as if you’re a smoker – this could make a big difference to your retirement income.
There are different types of annuity to consider too, including those that:
- benefit your spouse or partner
- are linked to investments
- offer a fixed level of income
- track inflation
- guarantee to pay out for a set number of years even if you die.
Pension drawdown – also known as income drawdown – lets you take a taxable income from your pension each year while leaving the rest invested. You can choose the level of income you receive and the rest of your portfolio has the opportunity to grow.
There are two types of pension drawdown:
- 1. Capped drawdown
This is the most common and is where a cap is placed on the level of income you can take each year. There is no lower limit and you can choose to take no income at all.
- 2. Flexible drawdown
Introduced in April 2011, this is the same but without the cap – you can withdraw as much as you like. In order to be eligible for flexible drawdown, you must have at least £20,000 of secure pension income in place.
Pension drawdown planning is complex and involves a number of risks, whilst the death benefits can be taken in a number of ways. Careful planning and professional advice are essential.
Nearing retirement checklist
- Review your investments to ensure there is no shortfall
- Increase your investment if there is a shortfall
- Restructure your investments to reflect your attitude to risk
- Start thinking about your retirement income options
- Always shop around for an annuity before you buy.
A financial adviser can help you to plan and invest for a comfortable retirement. They will review your investments, restructure them if necessary and make recommendations on how much you should be saving to address any gaps or shortfalls. They will also be able to help you to decide how to convert your pension and find the right option for your circumstances.
Contact us to find out how we can help you.
Pension eligibility depends on personal circumstances. The way in which tax charges (or tax relief, as appropriate) are applied depends upon individual circumstances and may be subject to change in the future.
This document is solely for information purposes and nothing in this document is intended to constitute advice or a recommendation. You should not make any investment decisions based upon its content. The value of pensions and the income from them can fall as well as rise and you may not get back the full amount you originally invested.
Whilst considerable care has been taken to ensure that the information contained within this document is accurate and up-to-date, no warranty is given as to the accuracy or completeness of any information. Errors and omissions excepted.