12th January 2018
The New Year is the perfect time to take stock of your finances, particularly if you’re approaching retirement. If you have a defined contribution (also known as money purchase) pension, there are a lot of decisions to make due to the pension changes that came into force in April 2015.
To help with this, WEALTH at work, a leading provider of financial education, guidance and advice in the workplace, have created a list of top tips for those who are thinking about retiring in 2018.
1) YOU DECIDE! – It’s now easier than ever to access your defined contribution (DC) pension due to the flexibilities introduced in 2015. This is great news, but it’s also a frightening prospect because of the potential risks involved in managing your life’s savings such as being scammed, paying more tax than necessary or running out of money during retirement. This is why it’s crucial that you take your time to research and fully understand all of your options, so that you’re armed with all the facts to make informed decisions that best suit your lifestyle choices and needs.
2) List ALL your assets – Before you make any decisions about your retirement, work out exactly which assets you have and what they are all worth. You may have final salary pension benefits as well as defined contribution pension benefits and in addition other assets such as ISAs, shares and general savings; all of which need to be considered as part of a sensible retirement income.
3) Work out how much you need in retirement – Start by thinking about how much income you are going to need in retirement including essential income to meet your day-to-day living expenses (including household bills), and discretionary income for holidays, hobbies etc. You also need to think about how this income requirement may change over time. For example, income needs are widely believed to follow a ‘u shape’ in retirement with the first ‘active’ phase being the most expensive. Spending seems to fall after a while in what is known as the ‘passive’ phase, as people become a little less active and perhaps cut back on areas such as travelling. But costs then may go up later in retirement in the ‘supported’ phase, if extra care and support is required.
4) Carefully consider whether you can really afford to retire – Do you have enough put by to be able to afford to retire, or do you need to work a little bit 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. For example, a 65 year old man now has a 50% chance of living to 87 and a 65 year old woman has a 50% chance of living to 90.
5) Think about how to access your retirement income – If you’re sure you can afford to retire and if you have a DC pension, you need to decide how to access your income. You can choose between income drawdown, buying an annuity or taking it as a cash lump sum. It doesn’t have to be just one choice as you could even choose a combination of options. Don’t worry if it sounds overwhelming – financial education and/or regulated financial advice can help you understand exactly what each option means and which approach best suits your needs. Speak to your employer about any support that they provide.
6) Don’t pay unnecessary tax – Don’t forget, only the first 25% of a DC pension is tax free; the remaining 75% is taxed as earned income. So you could find yourself paying more tax than you need to if you don’t plan carefully. It’s worth looking at your options, for example, you may be better off taking a smaller amount each year from your pension, and top it up with withdrawals from your ISA to use for income, as this is paid tax free.
7) 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 you not exceeding the current £1 million lifetime allowance (rising to £1,030,000 from April 2018), and providing that the company pays out within two years of the date of death.
8) Shop around – Make sure that you shop around before you make any decisions about purchasing any retirement products. Research by consumer group Which? found that there could be a difference of up to £10,000 in charges over a decade between the most expensive drawdown provider versus the cheapest. It is crucial that you do as much research as possible to ensure you select a retirement option that best suits your needs. This means finding a solution that enables you to access the right amount of cash as and when you want it, and for as long as you need it.
9) Consider financial advice as an investment – Many people are concerned about the cost of financial advice without realising that when you buy retirement products such as annuities, through for example online brokers, there are commissions to be paid which can cost just as much, if not more than getting advice. In fact, getting financial advice should be seen as an investment; research suggests that individuals who take advice save on average £98 more every month and receive an additional income of £3,654 every year of their retirement, based upon a pension pot of £100,000. This is because a financial 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. This will also give you the benefit of consumer protection for the advice given, as well as a retirement plan tailored to your individual needs.
10) Protect yourself from scams – Scammers often use highly professional looking websites and marketing literature to lure you in, and they tend to sound completely legitimate when they cold call you. It’s easy to see why so many people are fooled. A staggering 10.9 million consumers have been victims of cold calls about their pension since April 2015, according to Citizens Advice. So, whatever you’re planning to do with your retirement savings, it’s really important to check whether any 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 www.fca.org.uk/scamsmart.
Jonathan Watts-Lay, Director at WEALTH at work, comments;
“The freedoms and flexibilities people now have with their pensions is a good thing, but it can be incredibly daunting. Individuals need to understand the many retirement income options they now have. In the past many people automatically bought annuities from their pension provider, even though there may have been better rates available elsewhere. But with many more choice now available, individuals need to make sure they look into all their options.”
He continues; “Many workplaces now offer support to their employees in terms of financial education, guidance and advice, so individuals should speak to their employer to find out what is available to help them.”
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