How you choose to take your pension is key to enjoying your ideal retirement. You have the freedom to take your pension in several ways - so let’s explore and weigh up your pension options.
This article was featured in The Sunday Times' 'Understanding Pensions' report 2021.
The past 18 months has been like no other. The scale and pace of change that we have all had to deal with has prompted many to reconsider their professional and personal priorities. For some, this will have sparked thoughts about retirement.
Stepping back from the workplace can feel daunting, especially when it’s the culmination of a life’s work. For others, giving up work entirely simply isn’t financially practical. That’s why flexi-retirement is becoming the go-to choice for many.
This usually means continuing to work after pension savings have been accessed, whether in the same job, a new role or on reduced hours. But making any change to your retirement plans will have financial implications - so proper planning is key. In particular, there are two steps you should take before making any firm decisions.
The first step is to decide what you want to achieve with a flexi-retirement, be it more free time to travel, a new home or to pay for a child’s education or house deposit.
Once a goal is in place, reviewing financial incomings and outgoings – what money is spent on now, what it might be spent on in the future and overall living costs – will help you set the framework to decide what is needed financially to make that goal possible.
Both establishing goals and reviewing outgoings is something that a professional financial adviser can help with. Some will use specialist cashflow modelling tools that look at current and future data on income, expenditure and lifestyle to show how cash requirements might rise or fall over time, helping provide a clear overview of what money is needed.
The next step is to unlock the right amount of pension savings. Some will want to take a tax-free lump sum from their retirement pot to fund their retirement, which could be as much as 25% of your savings.
The earliest this can be accessed is usually at the age of 55 but this will depend on the rules of the pension scheme you are in.
While accessing your pension before taking full retirement may be beneficial now, it will also affect the amount of income available in the remaining period of the plan.
Many people have alternative pension pots and savings available to them. Having a wider choice of options does mean that tax charges, such as the annual allowance, can come into play. The annual allowance means there is no tax relief on any pension saving over £40,000 in a year.
Savers should be mindful of the Money Purchase Annual Allowance (MPAA) too, which can reduce annual allowance. Those affected by the MPAA can be modest earners with salaries of £30,000 a year. For example if their pension contribution rate is more than 13.4%, it could breach the limit once their employer contributions and qualified pension growth is included.
Being mindful of these limits can help avoid tax issues – particularly for those wanting to continue to work.
Only once you have established a clear goal, and made sure you can afford to access the funds required without triggering tax charges or compromising your plans for later in life, should you commit to any decisions.
These can be complex issues with a multitude of aspects to consider. However, your retirement is important - so getting the right advice is essential.