19th December 2019
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 (DC) 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 and guidance in the workplace supported by regulated financial advice for individuals, has created a list of top 10 tips for those who are thinking about retiring in 2020.
1. Make sure your 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 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, so make sure your beneficiary details are up to date.
2. Don’t pay unnecessary tax
Usually only the first 25% of a 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 your non-pension savings first. Also, you may be better off taking a smaller amount each year from your pension, and then to top it up with withdrawals from your ISA, as this is paid tax free.
3. Think about how to access your pension income
If you have a DC pension, you need to decide whether you want to access your pension savings through income drawdown, buying an annuity, taking it as a cash lump sum, or a combination of these options. Help and support is available to help you understand what each of these options are, and which might be best for you. Speak to your employer about any support that they provide, such as financial education and/or access to regulated financial advice. You can also visit pensionwise.gov.uk.
4. 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 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 all worth, and the best way to use them to make sure you are not paying unnecessary tax.
5. 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 your day-to-day living expenses (household bills etc.), and discretionary income for holidays, hobbies etc. Don’t presume it is the same as your salary. 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 (NI), mortgages and loans may be paid off, and children are likely to be financially independent.
6. Shop around
Make sure that you shop around before you purchase any retirement products. The FCA found last year that those who go into income drawdown could increase their annual income by 13% by switching from a higher cost provider to a lower cost provider. It is important to not only check fees, but 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.
7. Carefully consider whether you can really 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 they will, so keep this in mind when doing your sums. Recent findings from the Pension Policy Institute (PPI) found that many people are likely to live 20-30 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.
8. Regulated financial advice can be an investment
The FCA found that only 11% of pensions were accessed to purchase an annuity (April 2018-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 of your assets, work out the most tax efficient way for you to fund your retirement and then put a bespoke plan in place for you, 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 highly professional looking websites and marketing literature to lure you in, and tend to sound completely 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 yourretirement savings, it’s vital to check whether the company that you’re planning to use is registered with the Financial Conduct Authority (FCA) https://register.fca.org.uk/. You 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.
10. Choose what is right for YOU
The ability to access your pension income in a way which works for you is great news, but it is also a frightening prospect for many. Losing your life savings to scams, paying more tax than necessary or running out of money during retirement are real concerns, so it is vital that you make sure that you fully understand all of your options, to be able to make informed decisions that best suit your lifestyle choices and needs.
Jonathan Watts-Lay, Director at WEALTH at work, comments;
“Deciding to retire can be an exciting time, but it can also be daunting. Hopefully our top tips will help encourage people to take stock hits New Year, and 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.
Watts-Lay concludes; “Many workplaces now 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.”