pension resolutions. |

26th January 2016

2015 has seen significant changes to the pensions’ landscape, such as the introduction of complete flexibility on how to access defined contribution (DC) pensions.

WEALTH at work, a leading provider of financial education in the workplace, supported by guidance and advice – has created a list of ‘Pension Resolutions’ that all those approaching retirement should consider doing.

YOU DECIDE! – For the first time most people approaching retirement are being given responsibility for how they manage their income in retirement. This is great news, but with responsibility comes risk, so make sure you fully understand all of your options and you are armed with all the facts.
What is your pension worth? – Don’t bury your head in the sand – work out what your pension is worth and how much income you are likely to have in retirement.
How much income do you need and want? – Work out how much income you are going to need in retirement. This is made up of two elements; essential income to meet your day to day living expenses (including household bills) and discretionary income for holidays, hobbies etc. Do these match the answers to Question 2, or do you need to consider working a little longer, or do you need to reassess your expectations?
Income drawdown or annuity – which is right for you? –Income drawdown is no longer the preserve of the wealthy. This means that instead of having to buy an annuity you can choose how and when you access your pension. Annuities will still be the right choice for some; particularly those that are risk averse so do get advice when deciding.
Work out how long you are likely to be retired – Research has found that most people live longer than they expect they will, so when working out how much you will need in retirement for the rest of your life, this is something to keep in mind.
Don’t pay unnecessary tax – If you do go down the income drawdown route, make sure that you think carefully about how you do this to help you avoid paying any unnecessary tax. It is possible to withdraw 25% of your pension in a tax free lump sum and money withdrawn from the remaining 75% is taxed as earned income. However, it is possible to withdraw smaller amounts; in other words, you do not have to take out all of your tax free cash in one go. Depending upon your circumstances, unless it’s required for something specific such as paying off the mortgage, why withdraw it just to invest it elsewhere and then possibly pay tax on it – you might as well consider leaving it in the pension where it has the potential to grow tax free and withdraw it as and when you need it (although be aware that if money remains invested it is subject to market risk).
Make sure your beneficiary details on your pension 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 lifetime allowance limit, and providing the company pays out within 2 years of date of death. Even if you die after age 75, your beneficiaries will pay tax only at their marginal tax (45% if taken as a lump sum before 6 April 2016) on the money they receive from your pension whatever age they happen to be!
Work out what income you could have from other assets – If you have ISAs, shares, deposit accounts, or any other assets, look at these as other potential forms of income in retirement. For example, you may be better off taking a smaller amount each year from your pension and top it up with income from your ISAs, as ISA income is paid tax free.
Advice can be cheaper than no advice and give you added consumer protection – Many people are concerned about the cost of advice without realising that when they buy retirement products such as annuities, through for example online brokers, they are paying commission which can cost just as much, if not more, than getting advice. The DIY approach could be fine if you know what you are doing and what options are best for you, but remember advice can be money well spent if it helps you make the right choices and you also have the benefit of added consumer protection for the advice given.
If eligible, consider buying extra state pension – Women born before April 6, 1953 and men before April 6, 1951 have an opportunity to top-up their state pension by up to £25 per week. Details can be found at: www.gov.uk/state-pension-topup