Pensions

One of the main advantages of saving into a pension is the option of a lump sum when you retire. Under current rules, most pension schemes allow you to withdraw 25% of the value as a tax-free lump sum. Some older-style occupational plans might allow you to take even more. This can provide a valuable boost to your retirement plans.

But just because this is the default option, is it the best solution for you? You can draw your pension in any manner you choose, providing you are over the minimum retirement age (currently 55, although rising to 57 by 2028).

In this guide, we look at the pros and cons of taking your lump sum and how it can fit in with your wider financial strategy.

What Do You Need the Money For?

A lump sum can be extremely useful when you retire. Reasons might include:

• Paying off your mortgage
• Undertaking home improvements
• Helping family
• Taking the holiday of a lifetime

But you don’t actually need to retire to withdraw your lump sum. If you are 55 and don’t plan to retire for another 10 years, you can still withdraw your lump sum now.

Of course, this means that you have less in the pot to fund your retirement. You should always think carefully before withdrawing money from your pension. If you have cash or other assets available, it can be more efficient to spend that money first.

Similarly, just because you are retiring doesn’t mean that you have to take your lump sum.

Withdrawing your 25% lump sum can be a good idea if you have a specific reason for needing the money. If you don’t have a purpose in mind, it’s usually better to leave the money to grow in your pension fund rather than earn minimal interest in a bank account.

Phasing the Withdrawal

You don’t have to take your lump sum all at once. Instead, you can stage it over a number of years, either on its own or combined with pension income. This has the following advantages:

• You can use the money to supplement your income without increasing your tax bill.
• You can vary the amount you withdraw as needed.
• Your remaining pension fund will continue to grow, potentially increasing the amount that you can withdraw later.

This can be the ideal option if you don’t actually need a lump sum, but want to generate a tax-efficient income.

Investment Options

Money invested in your pension fund grows free of most taxes. This, combined with tax relief on your contributions and the option to take a tax-free lump sum, makes pensions one of the most tax-efficient investment choices available.

If you withdraw your lump sum, you can re-invest the money. Depending on fluctuations in the market, it should continue to grow in value.

But this means the fund will be taxed like any other investment. You can place £20,000 per year in an ISA. However, any funds outside your ISA or pension will be subject to tax on interest, dividends, or capital gains.

In the current market, there are very few legitimate, regulated investments that you can’t access within a pension.

If you are considering taking your lump sum to invest elsewhere, moving your pension fund could allow you to do this without unravelling the beneficial tax treatment.

Passing on Wealth

Currently, pension funds are not included in your estate for inheritance tax purposes. Your pension can be passed on to your beneficiaries free of any tax if you die before age 75. If you die after age 75, your beneficiaries can withdraw your pension as an income and will be taxed at their own marginal rate.

If you want to make gifts during your lifetime, taking your tax-free lump sum is one way of funding this. However, withdrawing the money from your pension places it in your estate, potentially increasing your inheritance tax liability. Even when you give the money away, it remains in your estate for seven years.
It’s usually more efficient to use other assets first when making lifetime gifts, such as cash or investment funds. This means that your pension can continue to grow tax-efficiently outside your estate.

Continuing with Contributions

If you take taxable income from your pension, this triggers the Money Purchase Annual Allowance (MPAA), which restricts future contributions to £10,000 per year (gross).

Withdrawing a lump sum does not trigger the MPAA, which means you can continue making higher contributions.

However, there are rules around recycling tax-free cash to prevent people receiving double tax relief. Contributions may be classed as recycling if all of the following occur:

• The lump sum is over £7,500
• Contributions have increased by 30% or more
• The contributions comprise more than 30% of the lump sum
• The recycling is pre-planned

Recycling tax-free cash can result in unauthorised payment charges being applied to your lump sum. This can be up to 55%, as well as sanctions on the pension scheme.

Defined Benefit Schemes

This guide is mainly concerned with money purchase pension schemes, which allow you to flexibly withdraw 25% (or more) of the fund value.

Defined benefit schemes work differently, as once you choose your retirement options, you cannot change your mind later. You may be offered a lump sum under the scheme rules, or you might need to give up some of your income in exchange for a lump sum.

This can be a complex decision, and will depend on your circumstances, requirements, and the rules of the scheme.

Pension freedoms mean that you have more options than ever around how you take your pension benefits. A financial planner can help you create a retirement strategy that works for your lifestyle, goals, and tax situation.

Please don’t hesitate to contact a member of the team to find out more about retirement planning.

With the news that the Government have extended the deadline for filling any gaps in your National Insurance record, by making voluntary contributions, we wanted to revisit who should do this and the benefits.

Can I, and should I, boost my State Pension?

When the new State Pension was introduced from 6 April 2016, the Government also temporarily extended the normal six-year window which allows you to pay Voluntary (Class 2 or 3) National Insurance Contributions (NICs) to fill in gaps as far back as 6 April 2006.

The extension was initially due to end on 5 April 2023, but due to the volume of applications, this was extended to 31 July 2023. The Government have now issued a further extension to 5 April 2025.

Furthermore, they have announced that all relevant voluntary NIC payments will be accepted at the 2022-23 rates, right up until 5 April 2025.

You will no doubt have seen mention of this in the media over the last 12-18 months, with some articles claiming you can boost your pension by up to £50,000. This is, of course, the best case scenario, for someone topping-up ten years of NICs.

Should I do this?
The first step is to request a State Pension forecast and your National Insurance payment history. Both of which are available to download online, via your Government Gateway login. This will enable you to check that your NIC history is correct and that no eligible years have been mis-recorded.

If your State Pension forecast shows that you are already on track to claim £203.85 per week, this is the maximum or ‘full’ pension for 2023/24. You cannot increase your State Pension above the current ‘full’ pension of £203.85 per week.

The HMRC helpline (0800 731 0175 if you are not yet State Pension age, and 0800 731 0469 if you are already at State Pension age) has also proven to be very useful for several of our clients already, but do be prepared for a long wait to get through! The process has rightly proven very popular.

How much will I get?
This depends on your personal situation. However, in our experience the State Pension top-ups offer a very good, secure return. It’s always worth checking to see if you can increase your pension, and by how much, so that you can make an informed decision.

Things to consider before proceeding:

• You may be able to claim NIC credits
  Some people may be able to claim credits, rather than buy them. For example, time spent as a carer, or if you’re on certain benefits.
• Not all NIC years need the same amount of money to complete them, some will be cheaper
  For example, where you have worked a part year, and paid some NI in that year, the top-up required to complete that year will likely be lower than for a year where you didn’t pay any NIC at all.

   
  This is where the HMRC helpline can come in handy, advising you of how much a top up of a particular year will affect your pension.

• Some years won’t count
  This is particularly relevant for years prior to 2016 and if you were a member of a ‘Contracted Out’ pension scheme, and already gained 30 years by April 2016. Again, the helpline will be able to tell you if this is the case.
• If you’re self-employed, you could pay less to top-up
  The current self-employed rate of Voluntary contributions is £163.80 per year, where Class 3 is £824.20 per year. The rates for 2023/24 are higher, but, remember, the Government have confirmed the 2022/23 rates will apply for gap filling.
• Not everyone will be better off by topping up
  If the additional State Pension from topping-up pushes you into higher rate tax, the benefit from the top-up will be reduced. Your pension will still be higher, but it will take you longer to break even.

If you are expecting to receive certain benefits in retirement, this may be reduced by increasing your State Pension, so you may not end up better off.

Invitation

The best place to start with this particular decision is with the Future Pensions helpline as mentioned above.

If you’d like to discuss this in context to your wider financial planning, get in touch today to arrange a free, no-commitment consultation with a member of our team here at WMM.

You can call us on 01869 331469

This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at WMM (financial planning in Oxfordshire).

When the new State Pension was introduced from 6 April 2016, the Government also temporarily extended the normal six-year window which allows you to pay Voluntary (Class 2 or 3) National Insurance Contributions (NICs) to fill in gaps as far back as 6 April 2006.

This extension ends on 5 April 2023, meaning that you now have less than 6 months to take advantage.

After the deadline passes, the standard last 6 years restriction will apply.

You may already have seen mention of this in the media, with some articles claiming you can boost your pension by up to £55,000. This is, of course, the best case scenario, for someone topping-up ten years of NICs.

How do I know if this applies to me?
The first step is to request a State Pension forecast and your National Insurance payment history. Both of which are available to download online, via your Government Gateway login.

If your State Pension forecast shows that you are already on track to claim £185.15 per week, this is the maximum or ‘full’ pension for 2022/23. You cannot increase your State Pension above the current ‘full’ pension of £185.15 per week.

The HMRC helpline (0800 731 0175 if you are not yet State Pension age, and 0800 731 0469 if you are already at State Pension age) has also proven to be very useful for several of our clients already, but do be prepared for a wait to get through!

How much will I get?
This depends on your personal situation. However, in our experience the State Pension top-ups offer a very good, secure return. It’s always worth checking to see if you can increase your pension, and by how much, so that you can make an informed decision.

Things to consider before proceeding:

• You may be able to claim NIC credits
  Some people may be able to claim credits, rather than buy them. For example, time spent as a carer, or if you’re on certain benefits.
   
• Not all NIC years need the same amount of money to complete them, some will be cheaper
  For example, where you have worked a part year, and paid some NI in that year, the top-up required to complete that year will likely be lower than for a year where you didn’t pay any NIC at all.
   
  This is where the HMRC helpline can come in handy, advising you of how much a top up of a particular year will affect your pension.
   
• Some years won’t count
  This is particularly relevant for years prior to 2016 and if you were a member of a ‘Contracted Out’ pension scheme, and already gained 30 years by April 2016. Again, the helpline will be able to tell you if this is the case.
   
• If you’re self-employed, you could pay less to top-up
  The current self-employed rate of Voluntary contributions is £163.80 per year, where Class 3 is £824.20 per year.
   
• Not everyone will be better off by topping up
  If the additional State Pension from topping-up pushes you into higher rate tax, the benefit from the top-up will be reduced. You’ll still be better off, but it will take you longer to break even.

 
If you are expecting to receive certain benefits in retirement, this may be reduced by increasing your State Pension, so you may not end up better off.
 

Invitation

The best place to start with this particular decision is with the Future Pensions helpline as mentioned above.

If you’d like to discuss this in context to your wider financial planning, get in touch today to arrange a free, no-commitment consultation with a member of our team here at WMM.

You can call us on 01869 331469

This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at WMM (financial planning in Oxfordshire).

With UK inflation now standing at 10.1% (a 40-year high) and possibly set to rise to 18% early next year, pensioners (and those nearing retirement) are understandably looking to understand how to protect their nest egg. In this article our financial planning team at WMM offers some ideas on safeguarding your pension(s) against inflation, helping you to enjoy a sustainable and comfortable retirement. 

Invest in (but don’t rely on) your State Pension

The UK State Pension is one of the few sources of retirement income that offers a guaranteed annual increase of at least 2.5% (more, if CPI inflation or average wages are higher). In April 2023, it could rise as much as 10%. This would take it from the current £185.15 per week to around £203.67. Your State Pension lasts for the rest of your life and is not affected by stock market movements, due to its financing via National Insurance contributions.

However, the State Pension is not enough, alone, for most people to live a comfortable retirement. It is also coming under increasing scrutiny due to affordability. Liz Truss, the UK’s new Prime Minister is exploring whether the “triple lock” system can be kept due to its high cost. As such, it is wise to also build other non-State Pension income sources into a retirement plan.

Defined benefit pensions & annuities

Some employers – such as the NHS and Police – offer their workers a defined benefit pension which can greatly mitigate the impact of inflation on a retirement plan. These schemes offer a guaranteed, lifetime income in retirement (e.g. based on years of service and average career earnings) and often this will rise each year with inflation. 

Speak to a financial adviser, therefore, if you are considering transferring away from a defined benefit (or “final salary”) pension as the benefits are often attractive and difficult to replicate elsewhere. For those with defined contribution pension savings (involving a pension “pot”), buying an annuity can help to provide an indefinite, inflation-linked income in retirement. 

Annuities have been out of fashion for a while due to low interest rates, leading to relatively low annuity income offers. However, with rates now rising again, this may start to change.

Examine your strategy & withdrawal rate

If you see the value of your pension going down, be careful not to panic and impulsively sell your investments. Remember, not only does this potentially serve to crystallise your losses, but the cash you are left with is especially vulnerable to high inflation (due to poor interest rates on regular savings accounts). 

With that said, it often makes sense to re-examine your investment strategy as you near retirement. This may, or may not, involve moving from “riskier” assets to more “cautious” ones which provide lower volatility now, but with likely lower future returns. A lot will depend on your own unique plans for retirement, but just remember that if you plan to tick off a few ‘bucket list items’, or expect a long and healthy retirement, then you may need those higher returns!

It can also help to discuss your “safe withdrawal rate” with your financial adviser when the cost of living goes up (i.e. the amount you can regularly take from your pension savings without high risk of depleting them). Taking less each month, in the short term, may help your pension keep growing over the long-term as the remaining funds stay invested. Generally, a safe withdrawal rate of 4% from pension savings is sustainable in the UK. During high inflation periods, however, this may need to be temporarily lowered – e.g. to 3% or even less.

Invitation

Interested in finding out how we can optimise your financial plan and investment strategy? Get in touch today to arrange a free, no-commitment consultation with a member of our team here at WMM. 

You can call us on 01869 331469 

This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at WMM (financial planning in Oxfordshire).

For many people, retiring in your 50s is a primary financial goal. It can open up freedom to pursue the things you enjoy – such as sports, travel and voluntary work. Yet many people also underestimate how much they need to save to retire at 55. After all, UK life expectancy is over 81 years and, in one year, over 15,000 people may live to over 100. Retiring from 55, therefore, could mean needing a pension that lasts multiple decades. In this article, our financial planning team at WMM explores how much pension you need to retire at 55 – suggesting ideas to help people achieve their goals.

How much pension to retire at 55?

Everyone’s income needs are different in retirement. However, studies suggest that in 2022 a couple needs at least £15,700 to cover their basic needs in retirement (or, £29,100 to have a “comfortable” retirement). A single person could live a moderate lifestyle with about £20,000 per year. Assume, therefore, that you retire at 55 and live until 85. This means multiplying these figures by 30, at a minimum, to start to get an idea of how much pension you need to save.

Suppose you need £20,000 per year in retirement. To make this last over 30 years from age 55, you’d need at least £600,000 saved in your pension(s). However, things get more complicated due to different types of pension, as well as inflation.

First of all, most retired people do not simply live on income from a pension “pot” (e.g. from their workplace). They tend to also rely heavily on the State Pension, which comes from the UK government. In 2022-23, the full new State Pension is £185.15 per week (£9,627.80 per year) and requires 35 “qualifying years” on your National Insurance record. This takes away a lot of the pressure to save everything you need for retirement yourself, into a pension pot.

However, secondly, inflation erodes the value of money over time. £20,000 in 2022, for example, will buy fewer goods/services in 2030. This “downward pressure” on the value of your pension pot(s) typically means saving more than you might think you need, to account for the rising cost of living. Fortunately, the State Pension rises each tax year in line with inflation (at minimum). Many “final salary” pensions and annuities also do this. However, you will likely still need to take account of inflation in your pension investment strategy – both before and during retirement.

Ideas to retire at 55

To have a chance of retiring at 55, you first need to understand the pension landscape. Pension “pots” can be accessed from this age (rising to 57 in the future), yet some final salary schemes may not be available until later. Your State Pension, moreover, will not provide an income until you reach State Pension age – i.e. your late 60s. Earlier in your retirement from 55, therefore, it will be wise to consider other tax-efficient investment “vehicles” to provide an income until you can start accessing your pension(s). Here, a stocks & shares ISA can be a good option, since the capital can be accessed at any time.

Also, the less you need to spend in retirement, the less you need to save. For instance, having no mortgage from age 55 would take away a large monthly expense (although this goal may not be a priority or achievable for everyone). 

Finally, consider seeking financial advice if you want to retire from age 55. A financial planner can help you think through issues or opportunities you may not have considered. Bear in mind that the earlier you want to retire, the harder it is to project your cash flow, so you may benefit from the software and expertise our experts can offer.

Invitation

Interested in finding out how we can optimise your financial plan and investment strategy? Get in touch today to arrange a free, no-commitment consultation with a member of our team here at WMM. 

You can call us on 01869 331469 

This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at WMM (financial planning in Oxfordshire).

The State Pension is changing, and many people in receipt of it are asking what may lie ahead for their retirement income. The “triple lock” system, in particular, has raised fresh questions as the Government confirmed its suspension in the 2022-23 tax year (started on the 6th April 2022). Below, our financial planning team at WMM explains how the system works, how it has changed and what could lie ahead for the State Pension.

How the triple lock works

Income from the State Pension, in recent years, rises every tax year (April-April) in line with the highest of three measures:

• 2.5% (a flat rise).
• Inflation (measured in the previous September).
• Growth in average UK earnings (measured from May to July).

This “triple lock” system is designed to help ensure that the State Pension rises each year at least in line with the cost of living.

Recent changes

When COVID-19 brought an unprecedented shutdown to the UK economy from March 2020, the government introduced a range of measures to help support businesses and the wider population (e.g. furlough). These required huge amounts of borrowing – e.g. £297.7bn in the 12 months prior to March 2021 – which the government now faces increasing pressure to repay.

Moreover, one of the knock-on effects of furlough was that this distorted average earnings growth (point 2 3 above) as lockdown measures lifted, employers brought more workers back into the office and reinstated their normal wages. This pushed the growth figure to over 7.3%.

As such, this would have required the State Pension to rise by at least 7.3% in April 2022 – putting huge pressure on the public finances. To counter this, the government announced that the triple lock system would be suspended in 2022-23.

Instead, the State Pension has risen by 3.1%. 

Possible roads ahead

This 3.1% rise feels like a blow to many retired people. Not only is it less than half of what they would have received under the triple lock system, but it mirrors the inflation rate in September 2021. In 2022, however, inflation has risen considerably higher. 

In the 12 months to February 2022, the Consumer Prices Index (CPI) has gone up by 5.5%. The Bank of England (BoE), moreover, anticipates that this could go as high as 8% later in the year. This, naturally, raises a lot of questions. Will inflation be brought under control before the next tax year? If not, could the triple lock be suspended again?

A precedent has been set by the government, so these are legitimate questions. The current administration has clearly stated that they do not think the triple lock system should be around indefinitely. Rather, the commitment has been for the existing parliamentary term (i.e. up until 2024). Other major UK parties support keeping it, so the issue is likely to be debated fiercely in the coming general election.

It is a good idea to regularly review your income sources for your retirement. Your State Pension will likely be important, of course, but it will also help to have other pension schemes (e.g. a workplace and/or private pension) to help support your lifestyle. There are also other assets you can use, too, such as dividends and income from your ISA(s), rental income etc. 

With a diversified retirement portfolio, you can help mitigate the risks associated with specific assets or income streams (e.g. your State Pension).

Invitation

Interested in finding out how we can optimise your financial plan and investment strategy? Get in touch today to arrange a free, no-commitment consultation with a member of our team here at WMM. 

You can call us on 01869 331469 

This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at WMM (financial planning in Oxfordshire).