What Should You Do With Your Pension Pot When You Retire?

Nick Pensions & Benefits pensions 0 Comments

In recent posts I’ve discussed various aspects of saving for your retirement, including the state pension and how to trace lost or forgotten pensions.

Today I’m going to discuss what happens when that fateful day arrives.

Most pensions nowadays, workplace and private, involve building a ‘pot’ that can be turned into regular income in retirement. This is known as a defined contribution pension.

• There are also still some defined benefit pensions, where on retirement you receive a set income based on the number of years you have been contributing. These are generally regarded as the ‘gold standard’ for pensions, and you should think long and hard (and get independent financial advice) before cashing one of these in for a lump sum.

If you have a defined contribution pension, in this post I will look at what you can do with your pot once you are ready to start drawing an income from it. Following George Osborne’s 2014 pension freedom reforms, in most cases you can do this from age 55 upwards.

There are four main options. I’ll run through them now.

(1) Keep Your Pension Invested

There’s no obligation to start taking an income from your pension at any particular age. If you don’t need the money, therefore, there’s a case for letting it carry on growing tax-free until such time as you do.

(2) Buy an Annuity

This is the traditional method of funding your retirement. Using your pot to buy an annuity gives you a guaranteed income for life.

How much you will get depends on various factors. These include how much is in your pot, your age, whether you want your income to go up every year, and whether you want to pass on the annuity (e.g. to your spouse) when you die.

Annuity rates in recent years have been relatively low, though you may be able to get a higher quote if your health is poor (as the company doesn’t expect to have to pay out for as long!).

The government lets you withdraw 25% of your pension pot tax free, and the rest can be used to buy an annuity. Annuities are taxable, so depending on your other income, tax may be deducted before you receive your payments.

To get a rough idea how big an annuity your pot will buy, you can use the online calculator on the government’s Pension Wise website. When I tried this with a sample pot of £100,000 and taking an income at 62, I got a quote of £25,000 tax-free cash and a taxable annual income of £3,300 (£275 a month) for life.

(3) Take the Money in Chunks

Another option (from age 55 onwards) is to withdraw money from your fund in chunks as and when you need it. If you do this, 25% of each withdrawal will be tax free and the rest will be taxed along with any other income you earn. Not all pension providers currently offer this option.

(4) Use Flexible Drawdown

This is becoming a very popular method. Flexible drawdown involves taking money from your pot to provide a regular monthly income, while leaving the rest invested, hopefully to continue growing.

With flexible drawdown, you can withdraw 25% of your pension pot as a tax-free lump sum. The rest is then used to provide a regular, taxable income.

The process is quite straightforward. You simply notify your pension provider (or self-investment platform) that you wish to go into drawdown. They will then arrange this for you (for which a fee may be payable) and ensure that a payment goes into your bank account the same day every month from then onward.

You can keep your money in the same investments as before or take the opportunity to adjust them (perhaps switching to funds with lower charges). You can set the monthly income at any level you like and vary it any time as well, although again there may be charges for doing so.

As well as its flexibility, the drawdown option has the benefit that the remainder of your money stays invested and can continue to grow tax free.

The main risk, of course, is that your money will run out before you die. This isn’t a precise science as it depends on two things that are impossible to predict accurately – how long you will live and how well your investments perform.

When deciding how much it’s safe to draw every month, it’s therefore essential to take into account how long you expect to live in retirement. A 65-year-old man in Britain today has a 50% chance of living to the age of 87 and a 65-year-old woman to the age of 90. So you may easily have 30 years in retirement, or even longer.

As for what rate investments may grow, in the current investment climate an estimate of around 4% a year is considered prudent – but in reality, obviously, your investments may do better than this, or they could do worse.

Again, the Pension Wise website has a calculator that will give you a rough idea how much you can safely draw from your pension pot and how long it is likely to last. There are no guarantees, though, so if you opt for drawdown it’s important to review your arrangements regularly and adjust them as appropriate.

Other Options

The above are the main options, but there are others as well.

If you wish, from age 55 you can withdraw your whole pension pot. Again a quarter of this will be tax free and the remainder treated as taxable income in the year concerned. If you have a substantial pot, this could result in you being pushed into a higher tax-rate bracket that year, so this course of action is not generally recommended. The one time you might want to do it is if you have a small pension pot and/or debts you want to pay off.

You can also mix and match. For example, if you have £200,000 you could draw £50,000 in tax-free cash, put £50,000 into an annuity for a secure life-long income, and leave the rest in a drawdown product for continuing growth. There is actually much to be said for having a variety of income streams in retirement.

Final Thoughts

Even if you’re not near the stage of drawing your pension, it’s still important to understand how the system works and plan accordingly. Nobody wants to end up having to rely on the state pension to fund their later years.

If you ARE getting close to retirement, I highly recommend speaking to an independent financial adviser to discuss your specific circumstances and needs. If you’re over 50 you can also book a free telephone or face-to-face appointment with a Pension Wise adviser. They will go through the options with you and answer any questions you may have.

In any event, though, it’s important to plan carefully to take advantage of the range of tax-efficient saving and investing opportunities on offer, and ensure that when the time comes you have enough money to enjoy your ‘golden years’ rather than struggle through them.

Good luck, and I wish you a long, happy and prosperous retirement!

• You might also enjoy reading this comprehensive article on How to Make the Most of your Retirement.

How to Track Down Your Lost Pensions

Nick Pensions & Benefits pensions 0 Comments

Today I want to talk about what happens when you have several pensions from different periods in your career.

For most of us, the days of “a job for life” are long gone. People now have an average of eleven different jobs during their working lives, and it’s common to start a new pension at each workplace.

You can thus accumulate a number of pensions and it can be easy to lose track of and even forget about some of them.

Tracing Lost Pensions

In most cases, thankfully, tracing old pensions isn’t too difficult.

For one thing, all pension providers are legally required to send you an annual statement showing how much your pension is worth and how much income it could provide in retirement.

If you’re no longer receiving these statements, maybe because you’ve moved a few times, there are various options open to you.

The first thing you should do is contact your old employer in the case of a workplace pension, or the pension provider in the case of a private pension. When contacting a previous employer you will need to provide as much of the following information as possible:

• Date of birth
• National Insurance number
• When you started and stopped working for the company
• When you joined and left the pension scheme

With a private pension provider you will need to provide:

• Plan number
• Date of birth
• National Insurance number
• Date your pension was set up

Obviously if you don’t have all this information it’s not the end of the world, but it may be harder for the scheme managers to track your pension down.

Ask the provider for as much information as possible about the pension. This should include what type it is (e.g. defined benefit or defined contribution), how much is currently in the pot, how much income it’s likely to provide in retirement, and (very importantly) whether it’s possible to transfer the pension to another provider and any charges this would incur. The Money Advice Service has template letters you can use when writing to a former employer or private pension provider for this purpose.

The Pension Tracing Service

But what if you’ve lost track of a pension and don’t have contact details for the provider? In that case, the government’s free Pension Tracing Service may be able to help.

All you need to know to use this is the name of your previous employer or pension provider. But before contacting the PTS, gather as much information as you can about the employer and/or the scheme, including the information mentioned earlier.

You can then call 0845 600 2537 or visit the PTS website and they will check your information against their database of over 200,000 pension schemes. They should be able to give you details of the scheme’s administrator, and you will need to contact them for further information as above.

Note that the PTS will only give you contact details for your scheme’s administrator. They won’t tell you whether you have a pension or what it is worth.

Consolidating Pensions

Rather than having lots of small pensions, it can make sense to consolidate them in a single pension.

This will simplify the admin and make it easier for you to see how much you have in your pension pot and what income it may be able to provide for you in retirement.

In addition, if you combine your pensions, you can choose a new one that can be easily managed online. You could, for example, use a self-investment platform such as Hargreaves Lansdown, Fidelity or Bestinvest (which I use myself). Another possibility is PensionBee, which specializes in consolidating multiple pensions into a single one you can manage online 24 hours a day.

You can then log into your account from any device to check your balance, make a contribution or see your projected retirement income. And you can choose an investment plan that has lower fees and is aligned with your expectations and attitude to risk.

To consolidate your pensions you will need to contact the providers to get transfer values, and then ask them to transfer the funds into your new scheme. This is generally a simple, straightforward procedure, though it can take a few weeks (or longer) for the transfers to go through.

Boosting Your Pension

Finally, here are a few more ways you may be able to boost the size of your pension.

• Increase your state pension by deferring taking it (see this recent post).
• You may also be able to increase your state pension by making additional National Insurance contributions to fill in missing years from your record.
• Set up a private pension and/or pay extra contributions into your workplace pension, up to the maximum allowed.
• Set up an ISA and/or LISA (under 40s only) for additional tax-free saving.
• Consider peer-to-peer lending and/or property crowdfunding as further ways to diversify your retirement saving.

Finally, if you’re a house owner aged 55 or over, you may be able to use equity release to extract some of the value of your property, either as a lump sum or a monthly income. Most commonly, this involves taking out a mortgage on your home which is only repayable when you die or move into long-term care. I wrote about equity release in this recent post.

As ever, if you have any comments or questions about this post, please do leave them below.