If you already have a financial planner you will be well informed of your income options in retirement. Your retirement plan will most likely comprise a mix of different sources to deliver a tax efficient ‘income stream’. Even without a financial planner, some people may still feel they have a solid plan in place. However, there is worryingly high number of people who aren’t really sure what they have or how they’ll provide for themselves in retirement, perhaps believing the State will support them.
What happens to your pension when you die? The rules about this were changed in 2015 under the Pension Freedoms. The good news is, your pensions are not usually considered to be part of your estate when you die – which means they are not subject to inheritance tax (IHT). Your surviving spouse or civil partner may also be able to access them, in certain circumstances. However, the rules depend on a range of factors including the type of pension in question and your age upon death. In this post, our team at WMM outlines how the rules work for different types of pension when someone dies.
Workplace pensions have changed in recent years. Traditionally, the responsibility was on the employee to join their workplace pension scheme. Today in 2021, however, most employees are automatically placed onto their employer’s scheme under the UK’s “auto-enrolment” rules – although you can choose to opt out. The amount that you pay in depends on your salary, since contributions are a percentage of your pay. The higher your pay, the more you automatically pay in. However, given that the rules have changed a lot over the years, many people are still not getting the most from auto-enrolment. Below, we explain some ideas showing how to do this.
Will you have enough money to sustain you in retirement? According to the UK Poverty 2019/20 report, over 2m people live in pension poverty. This refers to when “A person’s resources (mainly their material resources) are not sufficient to meet their minimum needs (including social participation)” in retirement. The biggest subsets seem to be in London (23%) and Wales (20%), but it also affects people across the whole UK.
Pension rules in the UK are notoriously complex. Not only are there multiple types of pensions to deal with, but drawing from them needs to be planned carefully. For instance, did you know that the State Pension is accessible from your State Pension age – 66 in 2021 – but you can only access your defined contribution pension(s) from age 55 (under the 2015 Pension Freedoms)?
There are many types of UK pension – with final salary pensions often referred to as “gold plated” ones. Also sometimes called defined benefit pensions, final salary pensions pay you a lifetime, guaranteed income in retirement – similar to a state pension.
If someone offered you an investment opportunity with “guaranteed, high returns”, you would be right to question their claim. Whether it’s bonds, stocks or property – all investing has an element of risk. Yet perhaps there is one “investment” which gets fairly close to being an exception. The UK state pension offers individuals a lifetime income in retirement, rising in line with inflation via the “triple lock” system. You do not need to worry about your state pension income falling due to a crash in the stock markets, or the rising cost of living eroding its spending power. Of course, government policy could change the state pension rules down the line – a distinct possibility, but highly unlikely to become a reality any time soon.
Did you know that there’s a limit to how much you save into a pension? In 2020-21, this “lifetime allowance” is set at £1.0731 million – with 55% tax levied on any withdrawals which exceed this amount (or 25% when taken as income). Unfortunately, many people in the UK are unaware of this limit throughout their careers, only to face difficult and costly decisions as retirement nears and the realisation dawns. Here at WMM, our aim is to help people avoid these kinds of errors and enjoy their hard-earned wealth once their careers wind down. Below, you’ll find some ideas about how to avoid breaching the lifetime allowance – as the rules currently stand.
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 Oxford).
Coronavirus has been a particularly stressful time for those looking to retire in the next 10-12 years. Many pensions have lost value since December 2019 as stock markets (which pensions tend to be heavily invested in) have taken a hit from the pandemic, lockdown and the resulting change in consumer behaviour and levels of concern.
Fortunately, equities have been steadily rising again across the developed world since the first quarter of 2020. The other good news is that there is still plenty of time to prepare for retirement for those who may be looking to finish work within 12 years. Below, our Oxford-based financial planning team here at WMM offers a handful of pension options for over-55s. Make sure you seek professional advice before acting on any of the below.
Leave your pension(s) invested
In 2020-21 the UK’s pension rules allow you to start taking money from a defined contribution pension once you reach age 55. You can withdraw up to 25% tax-free, for instance. However, just because you have this choice does not mean you should take it. You could leave the fund invested, allowing it to grow further so that you can enjoy a more comfortable lifestyle when you do eventually retire. However, it may be worth speaking to your financial planner about whether you could invest in lower-cost, better-performing funds to increase your real returns. It can also be wise to re-evaluate your contributions. Increasing them, for instance, could result in more money saved in retirement – allowing your pension(s) to stretch further.
Buy an annuity
In light of the pandemic, many people are attracted to an annuity. This is because it can provide a guaranteed, inflation-linked income throughout retirement. Some will be attracted to the financial stability and predictability this offers. Yet it’s important to consider that you may not get as much future monthly income from an annuity compared to income drawdown. In 2020, moreover, annuity companies have been affected by the pandemic. It may be wise, therefore, to consider ways to spread out your pension risk.
Take everything out at once
Of course, you may be tempted to empty your pension from the age of 55. Yet most financial planners would caution against this, since it’s likely to result in you not having enough money later in retirement. There are only specific circumstances in which this may be wise – e.g. if you have been diagnosed with an illness certain to result in death within the next 12 months.
Transfer your pension(s)
Pensions come in different shapes, types and sizes. Some involve building a pension pot over time with your employer, for instance (i.e. a workplace defined contribution pension). Others, such as final salary pensions, grant you an income in retirement from your employer based on criteria such as your years of service and salary in employment. There are advantages and also disadvantages to each of these pensions, so it may make sense to transfer from the latter to the former in certain cases (e.g. if you want to leave your pension as an inheritance one day). Bear in mind, however, that this is a big decision that cannot be reversed once made. You can also only move from a final salary pension to a defined contribution scheme – not vice versa.
There are many other options available for over-55s who are thinking about retiring within the next 12 years or so. Above, we’ve outlined an overview of just some of the possible options. The important thing to remember is that your decision(s) regarding your pension is likely to have significant repercussions on when you retire, and what that retirement will look like. As such, it’s always worth considering professional advice to make sure you make the best decision.
Interested in finding out how we can optimise your financial plan and future income prospects? 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