The prospect of retiring is exciting, but with so many pension options to consider, these 10 tips are designed to help.
Many people use the new year as an opportunity to review their finances and make plans for the year ahead. If you are planning to retire this year and have a defined contribution pension, you have a lot of options to consider before making any decisions.
To help with this, WEALTH at work, a specialist provider of financial education, guidance and advice in the workplace, has created a list of top 10 tips for those who are thinking about retiring in 2020.
1) Pensions are not the only source of income
There are many assets such as ISAs, shares and general savings that can be used as potential sources of income in addition to your pensions. It is beneficial to work out which assets you have, what they are worth, and the best way to use them to make sure you are not paying unnecessary tax.
2) Consider how much you may need in retirement
Work out how much income you are going to need in retirement, including essential income to meet day-to-day living expenses (household bills, etc), and discretionary income for holidays and hobbies, etc.
It may be possible to have the same disposable income in retirement as when you were working, even if your pension income is less than half your salary. This is because when you retire, you may be paying less income tax, no national insurance, and any mortgages and loans may be paid off, while your children are likely to be financially independent.
3) Think about how to access your pension income
If you have a defined contribution pension, you need to decide whether you want to access your pension savings through: income drawdown, by buying an annuity, taking a cash lump sum, or a combination of these options.
Help and support is available to help you understand what each option, and which might be best for you. Speak to your employer about any support it may provide, such as financial education and/or access to regulated financial advice. You can also access Pension Wise, a free and impartial government service.
4) Shop around
Make sure that you shop around before you purchase any retirement products. The Financial Conduct Authority found last year that those who go into income drawdown could increase their annual income by 13% by switching to a lower-cost provider. It is important not only to check fees, but to make sure it suits your needs, and that you can withdraw cash as and when you want it, and for as long as you need it.
5) Don’t pay unnecessary tax
Usually only the first 25% of a defined contribution pension is tax-free (the calculation for a defined benefit scheme will be different); the remaining 75% is taxed as earned income.
Unfortunately, in recent years many people have found themselves paying more tax than they need to. For example, some people have taken their pension as a cash lump sum, not realising that it made them a higher-rate taxpayer.
It may be more tax-advantageous to take income from your non-pension savings first. Also, you may be better off taking a smaller amount each year from your pension, and then top it up with withdrawals from your ISA, as this is paid tax-free.
6) Consider whether you can afford to retire
Do you have enough put aside to be able to afford to retire, or do you need to work a little longer, or perhaps part time? Research has found that most people live longer than they expect to, so keep this in mind when doing your sums.
Recent findings from the Pension Policy Institute found that many people are likely to live 20 to 30 years beyond state pension age. The government also estimates that life expectancy in the UK for people aged 65 in 2016 to 2018 will be around 83.6 for men and around 86 for women.
7) Make sure beneficiary details are up to date
In 2015, the chancellor abolished tax on death on defined contribution pensions for anyone who dies before the age of 75. This means that any remaining pension can pass to your beneficiaries tax-free, subject to not exceeding the current £1,055,000 lifetime allowance and providing that the company pays out within two years of the date of death. Ensure that your beneficiary details are up to date.
8) Financial advice can be an investment
The FCA found that only 11% of pensions were accessed to purchase an annuity (April 2018 to Mar 2019). Increasing numbers are accessing their pension through income drawdown.
However, recent PPI research has found that cognitive decline over retirement may make it more difficult for some people to make appropriate decisions about how to access their savings in their older years.
Regulated financial advice can be a solution to this and actually costs the same, if not less than buying retirement products, such as annuities, through some online brokers.
It can also be seen as an investment, as an adviser will look at all your assets, work out the most tax-efficient way for you to fund your retirement and then put together a bespoke plan, which will support you throughout retirement.
In fact, research in 2017 found that “affluent” individuals who received advice accumulated on average £30,882 more in pension wealth than those who didn’t take advice, and those who are “just getting by” accumulated on average £25,859 more.
9) Protect yourself from scams
Scammers often use professional-looking websites and marketing literature to lure you in and tend to sound legitimate when they contact you. It’s easy to see why so many people are fooled, and it isn’t small amounts of money which are being taken.
Findings from the FCA and The Pensions Regulator show that victims of pension scams could lose 22 years’ worth of savings within 24 hours.
So, whatever you’re planning to do with your retirement savings, it’s vital to check whether the company you’re planning to use is registered with the FCA.
You can also visit the FCA’s ScamSmart website, which includes a warning list of companies operating without authorisation, or that are running scams.
10) Do what is right for you
It is vital that you make sure that you fully understand all your options, so that you can make informed decisions to best suit your needs.
Jonathan Watts-Lay, director of WEALTH at work, says: “Deciding to retire can be exciting, but it can also be daunting.
“Hopefully our top tips will encourage people to take stock this new year and also help them feel more confident about what they need to know, where to go for help, and, crucially, what they need to be wary of.
“Many workplaces offer support to their employees in terms of financial education, guidance and advice, so it is worth speaking to employers to find out what help is available.”
Jonathan Watts-Lay is director of WEALTH at work.
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