As your retirement nears, you’ll start to make plans and to look forward to the freedom of life after work. You’ll no doubt have been saving for this moment for a long time and you’ve probably read lots of advice – about what you should be doing in the run-up to retirement, and the decisions you should be making.
Here are three things you shouldn’t do when the time comes to access your pension.
1. Avoid taking your pension at 55 if you haven’t planned for it
The minimum retirement age is currently 55 (rising to 57 in 2028) but that doesn’t mean you have to start taking your benefits immediately. Your financial plan will be based on a chosen retirement date and retiring earlier than planned will have repercussions. If you think your desired date has changed, speak to us.
There are several things to consider before retiring early.
The Office for National Statistics (ONS) confirms that the average UK life expectancy is 79 years for males and nearly 83 for females. Retiring at 55 means you’ll need to budget your pension to last for another 25 years or more.
An Annuity provides a regular fixed income, and this makes budgeting easy. But ‘flexible’ options such as an Uncrystallised Fund Pension Lump Sum (UFPLS) or Flexi-Access Drawdown can be harder to manage.
You might also trigger the Money Purchase Annual Allowance (MPAA), reducing the amount you can contribute to pensions held elsewhere.
The Annual Allowance is the value of pension contributions you can make and still receive tax relief. For the 2020/21 tax year, the Annual Allowance stands at £40,000. Accessing your pension via certain Pension Freedom options will trigger the MPAA, reducing your Annual Allowance to £4,000.
If you intend to access pension benefits but continue working, for example, be aware that triggering the MPAA drastically decreases the amount you’ll be able to save tax-efficiently.
2. Avoid taking your whole pot in one go without considering the consequences
Decisions you make in the approach to retirement can have long-reaching consequences. Remember that you don’t need to make these decisions alone. We’re here to help you.
Taking your whole pot as a lump sum might be the right choice. If you have regular income from elsewhere – from investments or Buy to Let properties, for example – freeing up capital with a UFPLS could help make your world travel or house renovation plans a reality.
You might be considering using a lump sum to reduce the debt you take into retirement. This won’t be the right choice for everyone so speak to us if you’re considering taking a lump sum to reduce debt.
Taking a full UFPLS will free up money in one go but it will then be up to you to budget.
You’ll want to maintain your desired standard of living while ensuring you have enough money put aside to cover potential future expenditure – such as the cost of later life care. You might also plan on leaving an inheritance, so be sure to budget for leaving an amount to the next generation.
This can be a difficult juggling act.
We can help you fit your pension choice around your long-term plans. And remember, the value of advice doesn’t end when you retire. Estate planning, and budgeting during retirement, are equally important and we’re here to help.
3. Avoid making flexible withdrawals unless you need to
Flexible options such as Flexi-Access Drawdown give you full control over the pension income you take. You can withdraw any amount you choose, when you choose.
If your regular, fixed expenses are being covered elsewhere, a flexible option could be a great retirement choice. If your Flexi-Access withdrawals are going to be used to cover discretionary expenses, here are some things to bear in mind.
When markets are down, you’ll need to sell more units to realise the same amount
During periods of short-term market volatility, such as we saw at the start of the year, prices can fall. Withdrawing pension income during those times could see your remaining pension pot diminish quicker than expected. This is because when values are low, you’ll need to sell more units to realise the same amount.
If the withdrawal is for a discretionary expense, is it essential you withdraw the money? And do you need to withdraw now? Consider holding off on the withdrawal or finding the funds from elsewhere.
Holdings in cash could lose value in real terms
It’s important to have an emergency ‘rainy day’ fund and this will usually be held in cash. But be wary of holding too much money in cash.
Try to avoid making withdrawals if you don’t need to. With the Bank of England base rate low, holding withdrawals in cash could mean your money loses value in real terms.
Your tax bracket could rise if you withdraw too much
For the 2020/21 tax year, your Personal Allowance is £12,500. Any income you receive over this amount will be liable to income tax so keep track of your withdrawals.
A large withdrawal could push you into a different tax bracket and lead to an unexpected bill.
Get in touch
Your long-term financial plan is designed to give you the retirement you want but there are still important decisions to be made, even once you start drawing your pension.
If you are worried about how to budget with your retirement income or would like to discuss your retirement plans more generally, get in touch.
Please email firstname.lastname@example.org or call 0115 933 8433.
A pension is a long-term investment not normally accessible until 55. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.
Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation, and regulation which are subject to change in the future.