6th January 2021
Retirement plans for 2021 have changed for many due to the pandemic. Whilst some have decided to put their retirement on hold due to their savings taking a hit because of Covid-19, others are deciding to retire early after being discouraged about finding employment again when faced with redundancy.
But before making any decisions about their retirement plans, there are a lot of options for employees to consider.
To help, WEALTH at work has created a list of top 10 tips for employees who are thinking about retiring in 2021:
- Don’t pay unnecessary tax – Usually only the first 25% of a defined contribution (DC) pension is tax free (the calculation for a defined benefit (DB) 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 tax payer! It may be more tax advantageous to take income from non-pension savings first. Also, employees may be better off taking a smaller amount each year from their pension, and then to top it up with withdrawals from their ISA, as this is paid tax free.
- Carefully consider affordability – Employees will need to think about if they have enough put aside to be able to afford to retire, or if they need to work a little longer, or perhaps part-time? Research has found that most people live longer than they expect, so they should keep this in mind when doing the sums. The Government estimates that life expectancy in the UK for people aged 65 will be 85 years for men and 87 years for women.
- Estimate how much is needed in retirement – Employees should work out how much income they may need in retirement including essential income to meet their day-to-day living expenses (household bills etc.) and discretionary income for holidays, hobbies etc. They shouldn’t presume it is the same as their salary. It may be possible to have the same disposable income in retirement as when working, even if pension income is less than half of someone’s salary. This is because once retired, individuals may be paying less income tax, no National Insurance (NI), mortgages and loans may be paid off, no pension contributions and children are likely to be financially independent.
- Pensions are not the only source of income in retirement – When it comes to retirement, there are many assets such as ISAs, shares and general savings, which employees could use as potential sources of income in addition to their pensions. It is a good idea for them to work out which assets they have, what they are all worth, and the best way to use them to make sure they are not paying unnecessary tax.
- Think about how to access pension income – If employees have a DC pension, they can access their saving from age 55. They will need to decide whether they want to do this through income drawdown, buying an annuity, taking it as a cash lump sum, or a combination of these options.
For employees with a defined benefit (DB) pension, pension income is usually based on a rate set by the scheme (the accrual rate) and typically is a percentage of salary for the number of years in the scheme. A DB pension usually has a set retirement age of between 60 and 65 but some may be able to draw benefits earlier or later than this. Some people may want to transfer their DB pensions into a DC pension fund so that they can have greater flexibility over their savings. However, it is important to understand the advantages and disadvantages of this first, as well as the associated risks such as falling for a scam, buying inappropriate retirement products, paying more tax than necessary and ultimately running out of money.
Employees will need help to understand their options, and which might be the best for them. They could speak to Pension Wise for guidance about their DC pension options. Many companies also offer their employees financial education and guidance to help them understand their options at retirement
- Shop around – Employees should make sure that they shop around before they purchase any retirement products. Which? found that the difference between the cheapest and most expensive income drawdown plan for a £250,000 pot was £12,300 lost in charges over a 20 year period. It is important for employees to not only check fees, but to make sure it suits their needs, and that they can withdraw cash as and when they want it, and for as long as they need it.
- Make sure pension beneficiary details are up-to-date – In 2015, the Chancellor abolished tax on death on DC pensions for anyone who dies before the age of 75. This means that any remaining pension can pass onto beneficiaries tax free; subject to not exceeding the current £1,073,100 lifetime allowance, and providing that the company pays out within two years of the date of death, so employees should make sure their beneficiary details are up to date.
- Regulated financial advice can be an investment – The FCA found that only 6% of pensions were accessed to purchase an annuity in 2019/20. Increasing numbers are accessing their pension through income drawdown. However, 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. Employees need to realise that regulated financial advice can be a solution to this and may actually cost 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 assets, work out the most tax efficient way to fund retirement and then put a bespoke plan in place.
- Beware of scams – Scammers often use highly professional looking websites and marketing literature, and tend to sound completely legitimate when they contact someone. It’s easy to see why so many people are fooled, and it isn’t small amounts of money which are being taken. Action Fraud have found that more than £30m has been lost to fraudsters since 2017. So, whatever employees are planning to do with their retirement savings, it’s vital they check whether the company that they’re planning to use is registered with the Financial Conduct Authority (FCA) https://register.fca.org.uk/. They can also visit the FCA’s ScamSmart website which includes a warning list of companies operating without authorisation or running scams fca.org.uk/scamsmart.
- Make an informed choice – The ability to access pension income in a way which works for you is a great option to have, but it is also a frightening prospect for many. Losing life savings to scams, paying more tax than necessary or running out of money during retirement are real issues that employees face, so it is vital that they fully understand all of their options, to be able to make informed decisions that best suit their lifestyle choices and needs.
Jonathan Watts-Lay, Director at WEALTH at work, comments; “Whilst the retirement plans of many have been disrupted because of the pandemic, hopefully our top tips will help employees to understand the important things they need to consider before they retire, and help them feel more confident about what they need to need to know, where to go for help and what to look out for.”
Watts-Lay concludes; “Many employers now offer access to financial education, guidance and even regulated financial advice, to their retiring employees which can lead to better outcomes for all.”
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