Pension freedoms don’t have to be complicated.
1. Know what you need in retirement
It’s not easy knowing what you actually need in retirement. Traditionally, those saving for retirement are told they should aim for a percentage of their working income, but this doesn’t fit many peoples needs.
The Pension and Lifetime Savings Association have recently developed their Retirement Living Standards. These give everyone a great idea of what may be needed after tax in retirement, depending on where you live, whether you are single or a couple and what type of retirement you aspire to.
You also want to make sure you’re taking into account inflation. Having an income that increases with inflation means you’ll maintain the same spending power, although your initial income will be lower. Many people find they actually spend much less in the later years of retirement. Therefore choosing a higher initial income which doesn’t increase with inflation may be a better choice for people who want more in real terms in the initial years of retirement.
2. Build a plan to get it
If you don’t build a plan you risk taking too little each year in retirement and having too frugal a lifestyle, or worse: running out of money. The traditional advice of taking 4% of your fund each year simply doesn’t work, as in some years you will have other additional income and in others you won’t.
Any plan that you do make should include everything else you have, such as your state pension, any final salary pensions and any non pension savings and income, as well as your own pension pots.
Any plan will also need to last for as long as you are likely to need your income for, i.e. how long you are likely to live on average. This is usually much longer than many people think.
3. Don’t pay higher tax
Ideally you want to get the most income you can out of your pension pots. Overpaying tax wastes money that could be used for your income. It is never a good idea to draw-down from your pots and pay a high amount of tax. Any longer term plan you do make should be as tax efficient as possible.
If you have a combination of pension and savings pots, it’s important to remember that the income from your pensions will be taxed, whereas your savings will not. Using up your unused tax free allowance in any year is always a good idea if possible.
If you want to withdraw £20,000 in year one, then taking £12,500 from your pension pots and £7,500 from your savings will mean there is no tax to pay – as long as you have no other taxable income.
4. Avoid higher charges
All pensions and savings providers take charges from your pots. These charges include their administration, platform and the underlying investment costs. They also charge higher fees if they provide advice.
Paying higher charges can have a significant impact on your pension pots over time. 0.5% may not seem like much, but accumulated over the years it can result in quite a lot of money lost.
Total charges may range from around 0.5% p.a. to 3.0% p.a. between providers, which in return will give you different levels of advice, investment choice and help for these charges.
For many people who are not experienced investors and don’t wish to pick their own investments, a low cost provider with all inclusive charges and ready made investment portfolios is likely to provide the best option.
5. Review and stay on track
When it comes to retirement, what actually happens will often times be very different to what was expected.
For example, your investments will not grow as expected, tax levels will change and you may need extra income in certain years. Keep reviewing your plan each year to see if it is still on track, and make adjustments if needed. You’ll want to make sure your plan still works should you live longer, or need extra income in future.
If your plan is doing better than expected, you may wish to reduce the risk in your investments and only take as much as is needed.
How can we help you achieve all this?
We provide you with all of the planning and tax reduction tools discussed above completely free, incorporating the PLSA’s Retirement Living Standards to build you a tax efficient plan.