A steady income during retirement is important, but so too is making the right decisions when you are presented with complex financial options. The best advice is don’t rush pension decisions.
It’s exciting when you approach 55. Since April 2015, retirees have enjoyed considerable flexibility. If you have saved into a work or personal pension you might consider finishing work. You could go part-time, or even start a new business.
Importantly, you will have life choices. Travel, holidays and leisure time are more accessible. The big question is how do you make the right decisions?
Pension decisions have consequences
Something everyone should realise is that actions and decisions have consequences! The pension choices you make when you reach retirement age will affect you for the rest of your life.
We are all living longer. In many cases, people now live for more than twenty-five years if they retire at 55 (according to ONS data). That means it’s essential to plan the best sources of income across those years.
However, pension decisions can be confusing. Nobody wants to make the wrong choices. The options available can be daunting. If in doubt, you should always seek independent advice.
Your pension options
Just because you reach 55 doesn’t mean that you must start using your pension. When we talk to clients, the objective is to present all available options. This helps to select the best financial path, and based on personal circumstances.
* Don’t change anything
Pension rule number one: don’t rush into anything. You don’t always have to access your pension pot straight away. It’s not a deadline.
Many people carry on working reduced hours or part-time. If the mortgage is already cleared, you might not need to start drawing any pension. If you don’t need it, leave it in place. That means it has the potential to continue growing until you really need it.
* Select an annuity
If you like stability and knowing where you stand, an annuity (or guaranteed income) might be for you. When you retire, you can purchase a lifetime or fixed-term annuity with some or all of your pension fund. As always, take good independent advice as annuities differ between providers.
However, there is usually a range of options available. You can take a level payment or choose to increase it over time. You can also guarantee an income for a set number of years so that a beneficiary continues to receive income even if you die.
* Enjoy a flexible income
Circumstances change. There are few things set in stone. Therefore, being able to enjoy a flexible retirement income will suit many people.
Selecting a flexible retirement income product allows you draw down money as and when you need it. Like other options, you can take a 25% tax-free lump sum, but other income can be determined by your needs. However, as the fund is not linked to a guaranteed product (like an annuity), your overall investment could go up or down.
* Take it all
For some, there is a temptation to take the lot. Build a new house, travel the world or tuck your pension fund into a potentially lucrative investment. Stop! Always remember that you might need your pension income many years down the line.
While some people will use this option to clear debts, you really should proceed with care. Moreover, after the first 25%, you will be liable to pay tax – potentially much higher if you have other forms of income. Above all, you could leave yourself in a precarious position in later life if you take too much too soon.
* Lump sums
Depending on circumstances, you can take your pension fund in lump sums. As with other withdrawal routes, you will be liable for tax after the first 25%. Although this sounds a dramatic way to receive your pension, it can suit some lifestyles.
For example, if you have other income – either through work or as rental payments if you own property – you could use lump sums to fund one-off events or projects. A new car, holiday home, daughter’s wedding or a large family get-together. However, you will probably be liable for administration charges each time you receive lump sums.
* Mix and match
Most things in life are about balance. A mixed approach to receiving your pension will keep your options open and enable you to enjoy flexibility as and when you need it. Much will depend upon your age at retirement. Also, how many pension pots you have and whether you intend to carry on work in some capacity.
When you know where you stand, you can still draw 25% of your pension as a tax-free lump sum. You can invest a large part in an annuity to guarantee regular, fixed payments, and still leave some aside to draw down as and when required.
The logical way
There are many things to consider. How much tax will you pay on income received, and what happens to any remaining money when you die? These and other issues should be discussed upfront with your family and an independent financial adviser.
How we can help
Consistency is key where pensions are concerned. We approach the subject in a logical manner. That’s always been our ethos. We listen, get a full understanding of what you want to achieve, then help you plan to succeed. If you’re looking for advice on pensions, the Logic Wealth Planning team is here to help. Call us on 0808 123 4321 to arrange a free no-obligation meeting with a financial adviser.
Logic Wealth Planning provides independent financial advice in Manchester, Bury, Rochdale, Cheshire, and the surrounding area, but not limited to the region.