At 60, retirement is now getting real, what do you need to know to make sure it goes well from outset!
I am approaching retirement, what do I need to think about when it comes to pensions?
You may between 55 and 65. Retirement is now just around the corner, you may well be thinking about it on a daily basis!
You are now probably about to retire (or semi retire). Its likely now you have a definite vision in mind to spend more of your time… beaches, mountains, golf, grandkids.
Retirement is likely to last 25 to 30 years for most people. So now is the time to really think a bit more about it and make sure you refine your plan to provide what you need!
Assuming you are not paying an adviser, what do you really need to do now?
First up, retirement isn’t just about pensions, you may well have lots of non pension assets and incomes to also use. If you have, using all of these in the right way alongside your pensions is key.
Second, make sure you don’t do anything at this stage to end up paying more tax, or losing income. You’ll only have so much to last through retirement, make sure it works best for you.
Pensions
You have probably now been in a few different pension schemes. If you have done your homework you should know where all of these are by now. You will also know whether they are a pot, to take as you want, (a defined contribution pension), or a guaranteed income, (a final salary type pension)
Not got round to it yet? No problem. The first place to start is the Government’s pension tracing service.
The next thing to think about is your State Pension. Again, as per our age 40 blog, if you have managed to get an accurate forecast of your National Insurance contributions so you know what to expect, great! If not, we can help in our Dashboard area.
Make sure you can now access your latest pension pot values. You can add the latest pot values manually in Guiide, or, if you want to save yourself the effort to update them, bring in live updating values. Just follow the instructions in our Dashboard to do this.
Finally, get projections of any final salary pensions you have from when you expect to start taking them.
Non pension savings and income
As well as pensions what else can you put towards retirement… Do you have?
- ISAs or other savings
- Expected Income from a few years of future part-time work
- Any cash lump sums
- Any means tested benefits
- Rents or other income
- Home equity from downsizing, or equity release
Like pension pots and final salary pensions, just add these into Guiide to allow us to build you the best overall plan.
A final thought here…. Do you want to use any part of your pension pots to secure some guaranteed lifetime income?
If you have some income from a final salary scheme, this may be less of an issue. But for those with only the State Pension as guaranteed income, you may want to use some of your pension pots to purchase a little more above this. This may make sure you can always cover the essentials.
Key issues 1 – Cash lump sums and tax
You can take 25% of your pension pot as tax free cash. Any tax free cash you take and spend straight away won’t go towards your retirement income. Any you don’t plan to spend, you can put into your non pension savings.
Do you need this tax free cash now? Will it be used to pay off a mortgage, other debts or enjoy a big spend? If not, if you don’t take it now, you can keep it in your pension pots and get 25% of every payment from these tax free.
If you want more than 25% of any pot as a lump sum, any extra above the 25% will be taxable. This may even be taxed at a higher rate like 40% or 45% if its a lot extra.
Again, do you need this money now? If not, it may be better to put it towards your income over a number of years to reduce any tax paid.
Key Issues 2 – Income and tax
Income from all pensions is taxed, income taken from savings such as ISA or bank account is not.
Everyone has a tax free allowance (currently £12,570 a year for most people). So if someone has no other taxable income they can extract £12,570 tax free each year from their pension pots. (£16,760 if they did not take 25% tax free cash at retirement).
Yes, you may have other taxable income, such as some part time work or a final salary pension, but if you have any unused tax free allowance in a tax year you can use this to get out more from your pension pots tax free. Don’t use it that year and the opportunity is missed.
Sounds tricky? Don’t worry, Guiide works out your remaining tax free allowance each year and shows you how to take your income in a tax efficient way.
Key Issues 3 – Benefits
Benefits after State Pension Age are rare, but before State Pension Age many working people are eligible for Universal Credit to top up their income.
You may be tempted to take a small pension pot (under £10,000 for instance) all in one go. If you are on Universal Credit or other means tested benefits you really need to think this through.
LCP have provided a great tool here to help. The effect of taking pension pots (either as a lump sum or income) can have real consequences on benefit entitlements. At a high level unless you are taking money from these pots to pay off debts or make a large purchase, benefits can be severely affected.
Very few pension providers will warn you of this issue, so be careful before accessing pension pots if you receive means tested benefits.
Key Issues 4 – Providers and Investments
Providers – if you have a number of pension pots, will you really want to take income from these different places and deal with different provider’s call centers?
It’s more likely many will want to put their pots together to make it easier to take money from one place. If so, there is lots to think about. The main issues are:
- Don’t lose any guarantees when moving providers
- Make sure there are no exit penalties from your existing providers
- Ensure your new provider has clear annual charges you can understand in two minutes, with no hidden one off charges. If its not clear, maybe think why that is?
- Your provider should support you in your retirement journey. Drawdown isn’t easy, income isn’t guaranteed and your pots could run out. Lots of tools and support should be there to help you.
Investments – For most people leaving it to an investment expert is better than trying to manage your own investments. There are lots of low cost multi asset funds designed by experts. You can usually select one with the provider you choose. Many have simple off the shelf funds based on your age and goals.
Our last blog in this series will look at those aged 75, well into retirement and what they need to think about.
