Pensions & Benefits

Should you take a tax-free lump sum from your pension now?

Should You Take a Tax-Free Lump Sum from Your Pension Now?

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As speculation mounts ahead of Rachel Reeves’ upcoming budget, many UK retirees and those approaching retirement are wondering if now is the right time to take a tax-free lump sum from their pension. Already it appears growing numbers have been doing just that in anticipation of a possible tightening of the rules.

The rumoured changes in pension taxation could have significant implications, but should these potential shifts prompt immediate action? Let’s explore the factors you should consider.

What Is the Tax-Free Lump Sum?

In the UK, retirees can typically withdraw 25% of their pension pot as a tax-free lump sum once they reach the age of 55. This is an attractive option for many, offering access to a sizable portion of their savings without incurring tax. For some, it provides the flexibility to pay off debts, invest elsewhere, or simply enjoy a more comfortable lifestyle in retirement.

Rumoured Changes in the Budget

Rachel Reeves, the Chancellor, is reportedly considering reforms to pension tax relief, which could also extend to the tax-free lump sum. While no firm details have been announced, the possibility of reducing or capping the 25% tax-free allowance is circulating. This has led to concerns that those who wait may lose out on the full benefits they could currently access.

There’s also talk of broader reforms to pension rules, aimed at increasing revenue for public services and addressing the UK’s fiscal challenges. While these changes are still speculative, they are fuelling anxiety among pension holders who fear that future alterations could make withdrawing a tax-free lump sum less advantageous.

So Should You Act Now?

1. Certainty vs. Uncertainty

One of the main arguments for taking the lump sum now is to lock in the current 25% tax-free amount before any potential changes. Given that pension reforms often take time to be enacted and may not affect existing pension holders, acting sooner rather than later could provide peace of mind. However, if the government does decide to protect current retirees from any new rules, rushing to take the lump sum might be unnecessary.

2. Immediate Need for Funds

Another key factor is your immediate financial situation. If you have debts to clear, home improvements to make, or other significant expenses on the horizon, taking the tax-free lump sum now could offer a welcome cash injection. Conversely, if your pension pot is your primary source of retirement income, withdrawing a large sum may reduce your long-term financial security.

3. Future Investment Opportunities

Withdrawing your lump sum early could also open up other investment opportunities. If you have a clear plan for how you will use or invest the funds, you may benefit from accessing the money now. However, keep in mind that once withdrawn, the lump sum will no longer benefit from the tax advantages and potential growth offered within a pension.

  • Though you can of course reinvest the money in another tax-efficient vehicle, e.g. an ISA (annual limit £20,000) and/or premium bonds (maximum total £50,000).

4. Impact on Future Income

Remember that taking a lump sum now will reduce the size of your remaining pension pot, potentially lowering your future retirement income. If you rely heavily on your pension for day-to-day living, this could be a risky move. Make sure you understand how much income you’ll need later in life and whether taking the lump sum will still allow you to meet those needs.

5. Pension Lifetime Allowance

Another aspect to consider is the pension lifetime allowance (LTA), which capped the total amount you could invest across all your pensions without incurring an additional tax charge. While the LTA was abolished in the 2023 budget under Jeremy Hunt, there could be changes under Labour that might bring back a revised limit, especially if tax-relief reforms are on the table.

Seeking Professional Advice

If you’re unsure whether to take the lump sum, it’s essential to consult a financial advisor who can offer guidance based on your individual circumstances. Pension decisions are complex, and making the wrong move could have long-term financial implications.

Your advisor will be able to assess whether taking a lump sum now aligns with your retirement goals, or if it’s more prudent to wait and see what changes, if any, are introduced in future budgets.

Conclusion: Is Now the Time to Act?

The potential changes in Rachel Reeves’ budget have understandably raised concerns about pension taxation. While it’s tempting to act quickly to safeguard your tax-free lump sum, it’s important to weigh your immediate financial needs against the possible impact on your future retirement income.

Without firm details of what the budget may contain, it’s impossible to predict exactly how pension rules might change. For most, the best course of action will be to stay informed, assess your own financial situation, and seek professional advice before making any significant decisions.

After all, your pension is a key part of your long-term financial security, and decisions made in haste could have lasting consequences. Keep an eye on the upcoming budget announcements, and don’t hesitate to revisit your pension strategy once more concrete information is available.

As always, if you have any comments or questions about this post, please do leave them below. But bear in mind that I am not a qualified tax adviser and cannot give personal financial advice. All investing carries a risk of loss.

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Will You Get the Warm Home Discount?

Will You Get the Warm Home Discount?

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Today I am looking at the Warm Home Discount scheme. The 2024/25 version of this has just launched.

The WHD scheme provides people on low incomes and/or certain means-tested benefits with a discount of £150 on their electricity bill. This is a one-off payment that will be credited to your electricity account by March 2025. It won’t be paid to you in cash.

If you have a pre-payment electricity meter you can still get WHD. You may be given a voucher you can use to top up your payments. Your electricity supplier will tell you exactly how and when you will receive this.

You may be able to get the discount on your gas bill instead if your supplier provides you with both gas and electricity. You will need to ask your supplier about this.

To get the £150 discount, you need to have your name on the bill and either receive a qualifying benefit or (in Scotland) qualify under your supplier’s low-income criteria (see below).

If you live in England or Wales, you will qualify if you either:

You can check online if you’re eligible for the discount.

If you live in Scotland you will qualify if you either:

The Warm Home Discount scheme is not available in Northern Ireland. You can find out here about the NI Affordable Warmth scheme.

An important thing to note is that only pensioners who receive the Guarantee element of Pension Credit will qualify automatically for the Warm Home Discount. These people are known as ‘Core Group 1’ in England and Wales and the ‘Core Group’ in Scotland. If you’re in this group you should receive a letter between October 2024 and early January 2025 telling you when and how the discount will be paid. If you don’t get a letter and think you are eligible for the core group, you should contact the Warm Home Discount helpline on 0800 030 9322.

You should also still qualify for WHD if you live in England or Wales and:

  • your energy supplier is part of the scheme (see below)
  • you get certain means-tested benefits or tax credits
  • your property has a high energy cost score (see below)
  • your name (or your partner’s) is on the bill

This is known as being in ‘Core Group 2’. The qualifying means-tested benefits are:

  • Housing Benefit
  • income-related Employment and Support Allowance (ESA)
  • income-based Jobseeker’s Allowance (JSA)
  • Income Support
  • the ‘Savings Credit’ part of Pension Credit
  • Universal Credit

You could also qualify if your household income falls below a certain threshold and you get either:

  • Child Tax Credit
  • Working Tax Credit

Check if you’re eligible for the discount online.

Again, you should receive a letter between October 2024 and early January 2025 telling you about the discount if you’re eligible. In most cases you are no longer required to apply for it.

Most eligible households will receive an automatic discount. Your letter will say if you need to call a helpline by 28 February 2025 to confirm your details.

If you’re eligible, your electricity supplier will apply the discount to your bill by 31 March 2025.

If you live in Scotland and don’t get the Guarantee Element of Pension Credit, you may qualify to receive WHD if:

  • your energy supplier is part of the scheme
  • you (or your partner) get certain means-tested benefits or tax credits
  • your name (or your partner’s) is on the bill

Your supplier may have additional criteria so you will need to check with them if you’re eligible. This is known as being in the ‘broader group’. To get the discount you’ll need to stay with your supplier until it’s paid.

What Is the Energy Cost Score?

As mentioned above, if you are not in Core Group 1 in England and Wales, to qualify for WHD your property must also have a high energy cost score.

The Government models the energy cost score of your property based on official data about its characteristics. These include the property type, age, and floor area. The Government uses data from the Valuation Office Agency (VOA) to model your property’s energy cost score. They may also use your property’s Energy Performance Certificate (EPC), assuming it has one. Other sources and statistical methods may also be used for the small proportion of households where data is not otherwise available.

Each year the Government will decide what constitutes a high energy cost score. It’s not straightforward for an individual to determine whether they will be eligible under this criterion. If you fill in the online eligibility checker, however, it should indicate whether or not you are likely to qualify (when I tried this for some elderly friends, it said they would ‘probably’ qualify and should wait to receive a letter).

Which Suppliers Offer Warm Home Discount?

All the large energy suppliers offer WHD and some of the lesser-known ones as well. Below is a list of suppliers copied from the government webpage devoted to Warm Home Discount. You can check your eligibility on the supplier’s website or phone them up and ask.

    • 100Green (formerly Green Energy UK or GEUK)
    • Affect Energy – see Octopus Energy
    • Boost
    • British Gas
    • Bulb Energy – see Octopus Energy
    • Co-op Energy – see Octopus Energy
    • E – also known as E (Gas and Electricity)
    • Ecotricity
    • E.ON Next
    • EDF
    • Fuse Energy
    • Good Energy
    • Home Energy
    • London Power
    • Octopus Energy
    • Outfox the Market
    • OVO
    • Rebel Energy
    • Sainsbury’s Energy
    • Scottish Gas – see British Gas
    • ScottishPower
    • Shell Energy Retail
    • So Energy
    • Tomato Energy
    • TruEnergy
    • Utilita
    • Utility Warehouse

The government say that if the electricity supplier you were with stops trading, you may still be eligible for the Warm Home Discount. Ofgem will appoint your new supplier for you, and you should check with the new supplier to find out if you’re eligible for the discount.

  • If you are in the market for a new energy supplier, you may like to know that if you switch to EDF Energy you can get £50 credited to your account by clicking on my EDF referral link. I am an EDF customer myself and will also get £50 credited to my account if you do this and switch to EDF. This will not affect in any way the service you receive or the rate you are charged.

Other Winter Fuel Benefits

Two other benefits are also available to qualifying individuals.

1. People born before 23rd September 1958 and in receipt of pension credit or certain other welfare benefits are eligible for a Winter Fuel Payment. This is worth £200 or £300 per person and will be paid in November or December 2024. More information including eligibility details can be found on the official government website. As you may know, previously all state pensioners were entitled to WFP, but the new Labour government has chosen to restrict it to the poorest pensioners only.

2. In the event of a prolonged cold spell, most people receiving Pension Credit will receive Cold Weather Payments. People on Income Support, Jobseeker’s Allowance, Employment and Support Allowance (ESA) and Universal Credit may also qualify depending on their circumstances, e.g. if they have a disability and/or a disabled child living with them. You will get this payment if the average temperature in your area is recorded as, or forecast to be, zero degrees Celsius or below for seven consecutive days. You get £25 for each seven-day period of very cold weather between 1 November and 31 March. Note that people in Scotland don’t get Cold Weather Payments but might get an annual £50 Winter Heating Payment instead. This is paid regardless of weather conditions in your area.

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

This is the 2024 update of an annual post.

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How to reduce the impact of Rachel Reeves first budget

How to Reduce the Impact of Tax Rises in Rachel Reeves’ First Budget

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Updated and expanded 13 October 2024

The first budget under new Labour Chancellor Rachel Reeves is scheduled for Wednesday 30 October 2024.

Speculation is rife about potential tax rises aimed at addressing the country’s economic challenges. But while tax increases appear inevitable, there is still time to take proactive steps to minimize their impact on your finances.

Here are some tips for how to prepare for and reduce the burden of potential tax hikes.

1. Maximize Tax-Efficient Savings and Investments

One of the most effective ways to protect yourself from higher taxes is by taking full advantage of tax-efficient savings and investment vehicles. These include:

  • ISA Allowances: The annual ISA (Individual Savings Account) allowance is currently £20,000. Money saved in an ISA grows tax-free, meaning you won’t pay any income tax, dividend tax or capital gains tax (CGT) on any profits made. As well as Cash ISAs, you can invest in Stocks and Shares ISAs and Innovative Finance ISAs (IFISAs).
  • Personal Savings Allowance (PSA): Basic rate taxpayers can earn up to £1,000 in savings interest tax-free. Higher rate taxpayers get a reduced allowance of £500.
  • Starting Rate for Savings: For those with a low overall income, the starting rate for savings can be especially beneficial. If your total income (excluding savings interest) is less than £17,570, you may qualify for the starting rate for savings, which can provide up to an additional £5,000 in tax-free interest. This is discussed in more detail in my recent post How to Maximize Your Tax-Free Savings Interest.
  • Premium Bonds: These offer a chance to win tax-free prizes each month. While the odds of a big win may be slim, any winnings are tax-free. Some other National Savings and Investments products, like certain Savings Certificates, also offer tax-free interest.
  • Venture Capital Schemes: For those willing to take more risk, schemes like the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) offer significant tax reliefs, including income tax relief and capital gains tax exemption on profits.

2. Diversify Your Investments

Diversification remains a cornerstone of sound investment strategy, especially in times of political and economic uncertainty. By spreading your investments across different asset classes – such as equities, bonds and property – you can reduce the risk of any single investment adversely affecting your portfolio. Consider international diversification as well to hedge against possible downturns in the UK economy.

3. Consider Using a ‘Bed and ISA’ Strategy

If you hold a lot of investments outside an ISA or other tax shelter, this can be a good strategy to reduce your tax liability.

Bed-and-ISA involves selling taxable stocks and shares and then repurchasing them within an ISA wrapper. This allows you to transfer investments into a tax-protected environment, where future gains and income will be sheltered from tax. Note that you cannot transfer taxable stocks and shares directly into an ISA, but Bed-and-ISA performs the same function.

On the minus side, Bed-and-ISA may incur some costs in terms of transaction fees and any difference (spread) between selling and buying prices. You may also become liable for CGT if any profits realized exceed your annual tax-free allowance. The long-term benefits can be substantial, however. This applies especially if – as seems likely – tax-free CGT allowances are reduced and the rates payable are increased. Of course, the Conservatives started doing this when they were in power.

4. Rebalance Your Portfolio Towards Tax-Efficient Assets

Different types of investments are subject to different levels of tax. It’s important to rebalance your portfolio to favour assets that could be less impacted by tax hikes.

  • Dividends: The tax-free dividend allowance for 2024/25 is £500, and anything above this is taxed at rates of 8.75% (basic rate taxpayers), 33.75% (higher rate), and 39.35% (additional rate). If dividend tax rises further, you may want to limit investments in dividend-paying stocks outside of tax-free wrappers like ISAs and pensions (see above).
  • Capital Gains: The capital gains tax (CGT) allowance has dropped to £3,000 for the 2024/25 tax year, and there are fears it could be cut further. Consider selling assets to crystallize gains while you can still use your allowance, or shift investments into tax-free vehicles like ISAs using the ‘Bed and ISA’ (or ‘Bed and Pension’) strategy discussed above..You can also offset capital gains with capital losses. If you have investments that have performed poorly, selling them to realize a loss can help offset gains elsewhere in your portfolio. Remember that CGT only applies when a profit (or loss) is actually realised.
  • Bonds: Government and corporate bonds are often seen as lower-risk investments and may be less vulnerable to tax increases than equity income streams. You might want to consider including more bonds in your portfolio.
  • Commodities: Gold and other commodities have traditionally been seen as a safe haven in times of economic upheaval. There are risks, however, and it’s important to do your own ‘due diligence’ and seek professional advice before going down this route.

5. Use Your Pension Allowance

Pensions are one of the most tax-efficient ways to save for the future. Contributions receive tax relief at your marginal income tax rate, which means for every £100 you contribute, the government effectively adds £20 for basic-rate taxpayers, £40 for higher-rate taxpayers, and £45 for additional-rate taxpayers.

Consider increasing your pension contributions to mitigate the impact of other tax rises. Just be sure to keep within the current £60,000 annual pension contribution limit. Note that for those earning over £260,000 (adjusted income), the tax-free allowance tapers. More info about this can be found on the government website.

If you’re self-employed, consider setting up or increasing contributions to a private pension or Self-Invested Personal Pension (SIPP) to take full advantage of these benefits.

6. Plan for Inheritance Tax (IHT) Rises

Inheritance tax has long been a controversial topic, and it may well increase under the new government. Currently, the IHT threshold is £325,000, with an additional £175,000 allowance if you’re passing your main home to direct descendants. Anything above this is currently taxed at 40%.

To mitigate IHT risks:

  • Consider making gifts: You can give away up to £3,000 per year tax-free, with additional allowances for wedding gifts and gifts from surplus income. Gifts between spouses are normally exempt from CGT or IHT, allowing you to transfer assets and take advantage of both partners’ allowances.
  • Set up a trust: Placing assets in a trust may help reduce IHT liabilities.
  • Life insurance policies: Some people take out policies specifically designed to cover future IHT bills. Always seek professional advice, however, as trusts and insurance policies can be complex.

7. Review Your Income Structure

Reeves may target income tax thresholds and reliefs, particularly for higher earners. Reviewing how your income is structured could help mitigate the impact.

  • Salary Sacrifice Schemes: Consider participating in salary sacrifice schemes, where you give up part of your salary in exchange for benefits like pension contributions, childcare vouchers, or cycle-to-work schemes. This will reduce your taxable income.
  • Dividend Income: If you run a business or own shares, taking income as dividends can be more tax-efficient than a salary, particularly if the dividend tax rates remain lower than income tax rates. Any good accountant will be able to advise you.
  • Spousal Income Splitting: If your spouse is in a lower tax bracket, transferring income-generating assets to them can reduce your overall tax burden. This is particularly useful for rental income or dividends from jointly held investments.

8. Prepare for Property Tax Changes

Property taxes, including stamp duty and council tax, could see reforms or increases. Here’s how to plan.

  • Bring Forward Property Transactions: If you’re considering buying (or selling) property, it may be wise to do so before any potential stamp duty increases are announced. Locking in current rates could save you significant costs.
  • Consider Downsizing: If you anticipate increased council tax rates or other property-related taxes, downsizing to a smaller home could reduce your future tax liabilities and lower your overall living costs. And, of course, doing this should release some of the equity in your property, which you can then use to help maintain your standard of living.

9. Enhance Charitable Giving

If Reeves increases income tax or reduces the thresholds for higher tax rates, charitable giving can become a more attractive option.

  • Gift Aid: Donations made under Gift Aid are tax-efficient, as charities can claim an additional 25% from the government. Higher-rate taxpayers can claim back the difference between the basic rate and higher rate of tax on their donations.
  • Donor-Advised Funds: These funds allow you to make a charitable contribution, receive an immediate tax deduction, and then recommend grants from the fund over time. It’s a strategic way to manage charitable giving while benefiting from tax relief.

10. Stay Informed and Seek Professional Advice

Tax planning can be complex, especially in an uncertain economic environment. Staying informed about potential changes in the budget and seeking professional financial advice can help you adapt your strategy to minimize your tax liabilities effectively.

  • Monitor Budget Announcements: Keep an eye on the budget and any subsequent economic statements to understand how proposed changes might affect you. Quick responses can sometimes yield significant tax savings.
  • Consult a Financial Adviser: A qualified financial adviser can help tailor a tax-efficient strategy to your individual circumstances, taking into account your income, assets, and long-term financial goals.

Closing Thoughts

While tax rises in Rachel Reeves’ first budget may be inevitable, UK residents have various strategies at their disposal to mitigate the impact.

By taking advantage of tax-efficient investments, restructuring income and staying informed, you can protect your wealth and ensure that any tax increases have a minimal effect on your financial well-being. As always, professional advice tailored to your specific situation is invaluable in navigating these changes effectively.

If you have any comments or questions about this post, please do leave them below. But bear in mind that I am not a qualified tax adviser and cannot provide personal financial advice. All investing carries a risk of loss.

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Managing Time and Money in Retirement

Guest Post: How to Manage Your Time and Money in Retirement

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Today I have a guest post that may be of interest to many readers of this blog.

It has recently been reported that nearly 100,000 retirees have returned to work due to the cost of living crisis and the realization that they need more money to live in reasonable comfort.

To help those in or nearing retirement, my friends at Equity Release Supermarket have set out some of their top tips for older people on how best to manage their finances, time, and boundaries with loved ones, to support their overall mental and physical well-being.

 

Many consider retirement to be the first time in their adult lives that they can relax and prioritize doing what they enjoy most.

This new-found freedom can be overwhelming, however, and establishing a new routine can take time. What’s more, as the cost of living crisis continues, those in and approaching retirement likely need to pay closer attention to their personal finances and outgoings.

Mark Gregory, Founder and CEO at Equity Release Supermarket, explains: “We speak to hundreds of over 55s each week and, for many people, the prospect of spending more time with loved ones and being able to offer support to their family is what they look forward to most. We also see how people want to use retirement as an opportunity to pursue budding interests or fulfil personal goals.

“As a result, it is important that those in and approaching this stage of their life manage both their time and money, helping to get the most from their retirement plan and budget.”

To help, the experts at Equity Release Supermarket have shared steps for retirees to keep on top of their time and finances to ultimately support their well-being and achieve their retirement goals.

Set goals by creating a retirement plan

Whether retirement is a few years away or you’ve already stopped working, we recommend making a retirement plan.

Start by thinking about your long term goals, such as places you want to travel to or whether you’d be interested in learning a new skill in the future. Then, consider what day-to-day activities you enjoy doing, such as spending time with grandchildren or visiting friends, as well as tasks you want to tick off your to-do list. This could include anything from giving your garden a makeover to clearing out old items from the loft.

Mapping out your days, weeks, and even years with goals and activities that will bring you fulfilment will help you organize your priorities for retirement. You could write these goals down in a notepad or even create a vision board.

Regardless of your process, make sure your retirement plan is something you can physically refer to in the future, rather than just having all the ideas up in your head.

Check in with your budget

When it comes to planning your yearly budget, you will need to establish how much money you require for your outgoings and living costs, as well as any big expenses you have planned for retirement. This could be anything from a bucket-list travel destination to supporting a son or daughter in buying their first home.

If possible, you should also aim to create an emergency savings pot, to use for any unexpected expenses.

However, it is important to remember that just because you have set your budget, those figures are not set in stone.

There are many factors that can affect your outgoings, from the ongoing cost of living crisis to personal changes such as marriage, divorce, moving house/downsizing or serious illness. Be flexible with your budget and priorities to accommodate these changes and the impact they may have on your personal finances. You might find that you need to seek out other financial options or guidance to support both your retirement and your loved ones.

It’s also important to continually check whether the money you’ve set aside for big expenses is working for you and your well-being. You might realize that you want to spend more money on things you hadn’t planned for, such as renovating the house or going on a once-in-a-lifetime holiday – in which case, you will need to update your financial plan accordingly.

Communicate with loved ones

Although creating a clear plan for retirement is essential, you also need to be mindful that life does not follow a set path.

From your physical health and mobility to ticking off your travel plans, your goals and potential limitations in retirement will adjust over time – and that’s fine and to be expected.

As difficult as it may be to admit, it can become a burden to spend your free time exactly as planned or support loved ones as much as you hoped. In these instances, it is important to keep communicating with your loved ones and be honest with them, so they can offer you support too. This will help to alleviate any pressure you may be feeling and allow your family and friends to be more accommodating of your situation.

Take care of your physical and mental well-being

It is important to make time in retirement for activities that will aid your well-being, especially as loneliness and depression are increasingly prevalent in later life.

Without the daily company of colleagues, you need to ensure you still get chances to socialize and see friends. Whether it’s arranging a coffee catch-up or joining a new local club, there are plenty of ways to incorporate social activities into the week without spending too much money, seeing both old friends and making new ones.

You can also take up activities that will benefit your physical and mental health at the same time, such as walking or low-impact exercises such as Pilates or yoga.

Think about the future

Although retirement may have been the end goal for your working life, it doesn’t mean you should stop planning for the future.

For example, you can make financial decisions that will save time and money in the long run. This could include minimizing your monthly outgoings to pay off existing mortgages quicker, as well as potentially providing you and your loved ones with more freedom later down the line.

If you’re planning to leave an inheritance to your children or family members, it is also worth considering gifting this money instead. Money gifted through equity release [or otherwise] becomes exempt from inheritance tax, provided that the giver lives for seven years afterwards. This can be a useful strategy for those who want to offer more financial support to loved ones throughout retirement and see the positive impact of this themselves.

So there you have it, five tips for getting the most from retirement. For more information about finances in retirement, visit the Equity Release Supermarket website.

My thoughts

Thanks again to my friends at Equity Release Supermarket for a useful and thought-provoking article.

I do agree it’s important to cultivate a strong social network in retirement, both with existing friends and family and with new friends and connections.

Time and again, studies have found that older people are both mentally and physically healthier when they foster relationships with others and maintain strong social connections. By contrast, social isolation and loneliness in old age have been linked to higher risks of heart disease, obesity, depression, cognitive decline, and so on.

Staying connected is especially important if (like me) you live alone. Social groups such as U3A are inexpensive to join and offer a wide range of activities, from rambling to guitar-playing, bird-watching to music appreciation. It’s well worth checking if there is a U3A group in your area. I recently joined not one but two local U3A groups and plan to write a post about this soon.

it’s also important to pay careful attention to your finances in retirement. On the one hand, you need to watch your income and expenditure to ensure you don’t run out of money in old age. On the other hand, though, you don’t want to deprive yourself without good reason and end up leading an unnecessarily frugal existence in what should be your ‘golden years’.

If you’re unsure about your finances, it can be a good idea to have a chat with a professional financial adviser. You definitely don’t need to be super-wealthy for this. Take a look at my blog post 10 Reasons Over-50s May Need an Independent Financial Adviser for more information. Most advisers (including mine) will be happy to arrange an initial meeting free of charge and without obligation.

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

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Equity Release Reasons

Why Are People Opting for Equity Release?

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I have discussed equity release on various occasions on Pounds and Sense, including my article Should You Use Equity Release to Unlock the Value of Your Home?

As you probably know, equity release is a method of unlocking funds tied up in your property. It is open to homeowners aged 55 and over (60 and over in the case of home reversion plans).

In recent years equity release has become increasingly popular, and even rising interest rates have done little to dampen this trend. So today I thought I would look at the main reasons people are opting for equity release. I am indebted to my colleagues from Equity Release Supermarket for providing information (based on their internal data) on the top reasons people are releasing equity, as well as which reasons are seeing the biggest increases.

The table below shows the top reasons people have been using equity release over the last six months.

Rank Reason for equity release
1 Repay mortgage
2 Home improvements
3 Debt consolidation
4 Supplement income
5 New/second home purchase

 

As the table shows, repaying a mortgage is the number one reason over 55’s have released equity. The data shows that, on average, 21.1% of completed cases planned to pay off an existing mortgage with the money released.

Home improvements are the second most common reason, with an average of 17.9% of borrowers raising money for a renovation project.

Debt consolidation is the third most common reason for equity release, at a slightly lower average of 13.7%. Interestingly, when looking at the data by month, using equity release for debt consolidation peaked at 18% in December 2022.

The data also reveals which reasons for equity release have increased in popularity over the last six months, with home improvements seeing the biggest increase, growing by 7.7%.

Gifting money is becoming an increasingly popular reason to release equity too. In the last four months alone, gifting money that has been released through an equity release scheme has risen by 2%.

Mark Gregory, CEO and Founder of Equity Release Supermarket, has commented on the data:

“Equity release is available for homeowners over the age of 55 who wish to free up some of the money, tax-free, that has been built up in the equity of their home. The interest rate is fixed for life and the plan is repaid when the homeowner dies or moves into long term care.

“It is perhaps unsurprising that repaying a mortgage is the top reason for equity release. As interest rates and living costs continue to rise, borrowers will be looking for ways to reduce their monthly payments. By using an equity release scheme, such as a lifetime mortgage, to pay off your existing interest only mortgage you will no longer need to make monthly payments unless desired. This can help make monthly savings and alleviate financial pressures, especially for those who have seen their mortgage payments rise in recent months due to interest rates.

“It is interesting to see that gifting money through equity release has risen over the last six months. Money gifted through equity release becomes exempt from inheritance tax, provided that the gift giver lives for seven years afterwards. Inheritance tax can significantly reduce the amount of wealth that you may be able to pass on, so we often find that many people turn to equity release as a strategy for reducing the impact it will have on an estate.

“In this uncertain economic climate, it is more important than ever that borrowers are getting advice on what product options are available across the whole equity release market. For anyone considering equity release, we would suggest discussing your plans with one of our equity release advisers.”

My Thoughts

If you’re looking for a way to release money from your property – whether to pay off debts/mortgages, fund specific purchases, assist children or other family members, or just make later life more comfortable – equity release is certainly something you may want to consider. 

The main downside is – of course – that ultimately there will be less money to pass on to your beneficiaries. All reputable providers, however, offer a no-negative-equity guarantee. They may also be able to arrange plans where a certain amount of cash is guaranteed to remain in your estate, if you so wish.

Equity release interest rates in most cases are fixed for life, so you will know from the start the liability you are taking on. Of course, the longer you remain living in your home, the larger the debt eventually payable from your estate will be. 

If you think equity release may be right for you, you will need to discuss this fully with an independent adviser before proceeding. As well as Equity Release Supermarket other well-known firms in this field include Key Equity Release and Age Partnership. The Equity Release Council has a full list of members on its website.

The adviser will discuss your needs and circumstances, and – assuming they think equity release is right for you – make a recommendation from the range of products on the market. You can, of course, speak to two or more different advisers if you wish before making any final decision.

Thank you again to my colleagues at Equity Release Supermarket for their assistance with this post. As always, if you have any comments or questions, please do leave them below as usual.

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Pension Credit

Here’s Why Older Pensioners Especially Should Apply for Pension Credit

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Updated 30 July 2024

Today I’m focusing on pension credit.

According to the government’s own figures, around a third of retirees who would be entitled to this state benefit aren’t currently claiming it. That means they are potentially missing out on an important boost to their pension.

Even more significantly, it means they may be missing out on a raft of other benefits and discounts too, for which pension credit acts as a gateway. More about this shortly.

Applying for pension credit is especially crucial for people who reached retirement age before April 2016 and therefore receive the old basic state pension rather than the new (higher) one. While it may seem (and indeed be) unfair that older pensioners receive a lower rate, they do have the opportunity to claim the savings credit element of pension credit, which newer retirees don’t.

Savings credit payments can provide an extra boost to your income and entitle you to other payments and benefits as well. And, very importantly, the eligibility rules are different from guarantee credit and (in my view anyway) a bit less stringent. But if you don’t apply for pension credit, you won’t get either.

But before we get into that, let’s recap on what pension credit is.

What is Pension Credit?

Pension credit is a state benefit that comes in two parts: guarantee credit and savings credit.

Guarantee credit boosts your weekly income to £182.60 if you’re single or £278.70 if you’re a couple (figures correct from 6 April 2023). You should be eligible for guarantee credit if you have reached state pension age and your total income is less than these amounts (even if you own your own home).

If you have under £10,000 in savings and investments this will not be taken into consideration. If you have over £10,000, it will be assumed that you earn £1 a week per £500 of savings and investments. This will be added to your total income when working out your eligibility for guarantee credit.

Savings credit is only available to people who reached the state pension age before 6 April 2016. It is meant as a reward for those who have made some additional provision for their retirement. It’s worth up to £15.94 a week for a single person or £17.84 for couples (2023/24 figures). Somewhat counter-intuitively, to qualify you must have a minimum income of £174.49 a week if you’re single and £277.12 a week for a couple (again 2023/24 figures). You must also have some savings or other extra income provision (e.g. a private pension).

It’s worth adding that if you pay mortgage interest or have other housing costs, have caring responsibilities, are responsible for a child, or are severely disabled, you may be entitled to more pension credit. If you receive attendance allowance or carers credit, for example, this may boost the amount that you’re entitled to.

The rules surrounding all this are complicated, but the government has provided a free online calculator you can use to work out whether you qualify and how much you might get. This is for guidance only, however. You can’t apply via the calculator and there is no guarantee you will receive the amount it shows you.

Until recently to actually apply for pension credit you had to phone the DWP’s pension credit helpline on 0800 991234 with your Nl number, details of your income, savings and investments, and your bank account details. The person you spoke to would then then take you through the application process. This option is still available, but recently an option to apply online has been added. This is quite separate from the free online calculator mentioned above.

As I recently helped an elderly friend do this, I can confirm that the online method works well, though the questions asked don’t entirely correspond with the questions on the free online calculator. But using the latter first should give you an idea whether you are likely to qualify for pension credit and how much you might get. You can also try the effect of changing the amount of capital/income in the calculator to see if you might qualify in future even if you don’t at present (perhaps due to having too much in savings).

Additional Benefits

As well as the money – which can amount to thousands of pounds a year – if you receive pension credit you will be entitled to a range of additional discounts and benefits. These may include:

  • reduced (or free) council tax
  • housing benefit
  • free TV licence if you are over 75
  • free NHS dental treatment
  • help towards the cost of glasses
  • help with the cost of travel to hospital
  • cold weather payments
  • automatic entitlement to the Warm Home Discount
  • free home insulation and boiler grants
  • extra money if you’re a carer
  • government cost of living payments
  • Winter Fuel Payments (as from winter 2024)

Even if you only receive a small amount of pension credit, you may be eligible for any of the above. So it really is important to apply if there is any chance you may qualify. 

More About Savings Credit

As I said above, only older pensioners who retired before April 2016 can get savings credit. But potentially a lot more people in this category may be eligible for it than is the case with guarantee credit.

Whereas guarantee credit is only paid to pensioners on a low income and with limited savings, that isn’t necessarily the case with savings credit. As I noted above, to qualify for savings credit there is actually a minimum earnings limit. And you do actually need to have some savings (or other income source/s apart from the state pension) to be eligible.

The rules are complicated, so – as I said above – the best thing is to use the free online calculator. If it appears you are eligible for savings credit (or guarantee credit) it will tell you, and how much.

It should be said that if you are only awarded savings credit and not guarantee credit, you may not qualify for all of the extra benefits mentioned above (free NHS dental treatment, for example). But even if, with savings credit only, you don’t qualify for the whole of the discounts mentioned, you may at least be eligible for a partial reduction.

Closing Thoughts

To sum up, if you’re of state pension age and have a limited income or savings, you should certainly look into pension credit. Similarly, if you have elderly friends or relatives, you should check eligibility on their behalf (with their permission, of course).

As I’ve said above, this applies especially to anyone who started receiving the state pension before April 2016 and is therefore getting the old basic state pension. This is lower than the new state pension, but you may potentially be eligible for the savings credit element of pension credit (as well as guarantee credit, which anyone of state pension age can qualify for).

While savings credit is generally only a small amount, receiving it will make you eligible for a range of other discounts and benefits, including (as from winter 2024) Winter Fuel Payments. So it really is well worth checking on the free online calculator and then applying (by phone or online) if it appears you might be eligible.

Finally, you might like to know that (thankfully) my friend’s online application was successful. He got a letter a week later saying that he would be receiving pension credit (savings credit only) at a rate of about £5 a week, rising to just over £6 a week the following April. Naturally he was pleased to hear this. And he was even more pleased when he realised he would be getting the other benefits and discounts mentioned earlier as well. As an 84-year-old man who has recently lost his wife, this will certainly help make life a little more bearable for him.

As always, if you have any comments or questions about this article, please do post them below. Just bear in mind that I am not a qualified financial adviser or benefits adviser and cannot provide personal financial advice. If you require specific advice or assistance, your local Citizens Advice office would be one good place to start.

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Ten reasons over-50s may need an independent financial adviser

Ten Reasons Over-50s May Need an Independent Financial Adviser

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I’ve mentioned several times on PAS why I believe having an independent financial adviser makes sense, even if – like me – you consider yourself reasonably money-savvy.

So today I thought I would set out some reasons over-50s (in particular) may benefit from having an independent financial adviser (IFA) or at least speaking to one.

This post has been created in association with my colleagues at Unbiased.co.uk, a well-established financial services website that can put you in touch with suitable IFAs in your area.

Reasons for Having an IFA

1. Helping Your Children Through College or University

If you have children, you will naturally want to help them complete their education safely and with a reasonable degree of comfort. Sadly the days of student grants (which I was lucky enough to benefit from in the 1970s) are well behind us now. There are various options for helping finance your children’s college or university education and a financial adviser will be able to explore these with you. They will also explain the pros and cons of the student loans system.

2 – Pension Planning

If you are over 50 you will inevitably be thinking about pension options, including when you can retire and how much income you can expect. An IFA will go through your finances with you and look at ways you may be able to boost your pension pot. From 55 onwards you can normally start to draw your pension, but you shouldn’t do this unless a financial adviser has assured you it will last you through retirement.

3. Investing

Hopefully by your fifties you will be earning a decent salary and may also have paid off your mortgage. You may also receive an inheritance or other windfall. Either way, if you find yourself with some spare cash you will want to invest it to get the best possible returns from it. An IFA will have access to all the latest information about a vast range of investment opportunities. They will guide you towards investments that are suitable for you based on your financial goals, your investment timeframe and your appetite for risk.

4. Starting Your Own Business

Especially at this time of upheaval due to Covid, many people are looking to start their own businesses in mid-life. That may be in response to redundancy or unemployment, or simply in search of a better work/life balance. An IFA can help you with the financial aspects of doing this, including raising money for tools, premises, transport and so on, or perhaps buying a franchise.

5. Emigrating or Retiring Abroad

Another way to revitalize your life may be to start afresh somewhere else, with new challenges and opportunities (and perhaps a better climate as well!). Or you may be looking to move to a favourite vacation destination to enjoy your retirement. Either way, an IFA will be happy to discuss the pros and cons with you, point out all the things you will need to take into account, and assist you with the financial arrangements.

6. Divorce

Sadly middle age sees the largest number of divorces. Your first priority here will be appointing a good solicitor to act on your behalf and protect your interests. Beyond that, though, divorce can have major ramifications for your finances. An IFA can help you assess your situation objectively and plan for a financially secure and stable future.

7. Downsizing

As the children grow up and leave home you may want to move to a smaller property – to make life simpler, save time on housework and free up money for more exciting things. An IFA can help you explore the implications of doing this and make the necessary financial arrangements.

8. Equity Release

If you don’t want to move – and are over 55 – equity release is another option for releasing funds. In recent years it has grown a lot in popularity. There are various possibilities, including home reversion plans and flexible lifetime mortgages. Most now come with a no-negative-equity guarantee, ensuring you won’t end up passing on debts to your next of kin. An IFA can go over the options with you and point out the pros and cons before you contact any providers.

9. Estate Planning

This obviously includes writing your will, but depending on your circumstances it can cover a lot of other things as well. Nobody wants to see all their money and assets falling into the hands of the taxman rather than going to their nearest and dearest. Speaking to an IFA who specializes in estate planning can give peace of mind and ensure that your loved ones are well provided for when you are no longer here yourself.

10. Helping Elderly Relatives

If you have elderly parents (or other relatives) you may find they are increasingly reliant on you for help and support. It may be up to you to arrange care for them and/or set up power of attorney so you can manage their affairs if this becomes necessary. They may also need help with estate planning (see above). An IFA can assist with all these things as well.

Getting a Free Financial Check-Up

Independent financial advisers do of course charge for their services. They are by definition unaffiliated and do not receive commission, so any recommendations they make are based solely on their client’s best interests. As I have said before on PAS, I certainly don’t begrudge paying my own financial adviser, Mike, as he has undoubtedly saved (and made) me a lot more money than he has cost me over the years.

Nonetheless, most IFAs will be happy to see you for an initial financial healthcheck free of charge. This can focus on a particular area of concern, so you could request an investments review, a pension review or a mortgage review. Alternatively, if you’re not sure which aspect of your finances needs more attention – or indeed whether you need advice at all – you could simply request a broad financial healthcheck.

Here’s what. Adrian Kidd, a financial planner at Radcliffe & Newlands, says about his approach on the Unbiased website:

‘I’d generally offer one or possibly two free consultations, taking about an hour, and these can be as specific or as broad as required. When someone books a financial healthcheck with me, I ask them to bring along all their documents relating to their finances – savings, investments, mortgages, loans, insurance, pensions, the works – so I can build up a complete picture of their affairs. I then go through these in more detail after the consultation, and follow up with an email that gives a summary of their overall financial situation.’

In these free check-ups: advisers won’t generally talk to you about products at all. The process of choosing the right products comes later, after the adviser has built up an understanding of you as a person and your financial planning needs. Only then will they recommend products, if asked to do so.

If you follow my link to the Unbiased website, you can complete a short, step-by-step questionnaire designed to identify the best type of financial adviser for your needs. You will then be shown a selection of suitable advisers in your area with contact information. They will be happy to answer any queries you may have and arrange an initial meeting without obligation.

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

Disclosure: This is a sponsored post on behalf of Unbiased.co.uk. If you click through my link and end up becoming a client of a financial adviser listed on the Unbiased site, I may receive a commission for introducing you. This will not affect the service you receive or any fees you are charged if you decide to proceed further.

  • This is a fully updated version of a post originally published in 2020.

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How to Claim Your State Pension

How to Claim Your State Pension

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Next month (God willing) I will reach my 66th birthday and start receiving the new state pension. I have been told that I will get my first payment on Christmas Eve, which I find quite a pleasing thought 🎅

Pounds and Sense is of course aimed primarily at older readers, some of whom will be coming up to state pension age as well. So I thought it might be useful to set out here what the process involves (and my experience with it).

The first thing to say is that you won’t automatically start receiving the state pension from the relevant (currently 66th) birthday. You do have to claim it. Fortunately, for the great majority of people, this is a simple, straightforward process.

Assuming the system works correctly (as it did for me), if you are eligible for a UK state pension you should receive a letter from the Department for Work & Pensions (DWP) explaining how to claim. This should arrive about four months before your qualifying birthday. I have copied the first page of the letter I received below.

State pension letter

As you can see, the letter explains what you have to do to claim your pension online (it also explains other methods of claiming). Even if you don’t receive a letter, you can do this as long as you are within four months of reaching your state pension age.

You will need to visit the website https://www.gov.uk/get-state-pension and fill in the simple claim form there. You will be asked to enter a few items of information including.

  1. The invitation code on the letter
  2. The date of your most recent marriage, civil partnership or divorce
  3. Dates of time spent living or working abroad
  4. Your personal or joint bank or building society details (where you want the pension paid into)

If you haven’t had the letter so don’t have an invitation code, you can still apply via the website but will need to provide other identifying information.

And that is basically all there is to it. In my case, after I submitted my claim online, I received another letter about two weeks later telling me when I would start receiving my pension (and how much it would be). The state pension is paid every four weeks in arrears, but I was told I would receive a partial payment initially (on Christmas Eve) and then go on to a regular four-week cycle.

Other Points

If you don’t want to claim your stare pension as soon as you’re eligible, you don’t have to. If you simply delay claiming, DWP will assume you wish to defer. Your state pension will increase for every week you defer, as long as you defer for a minimum of 9 weeks. Your pension will increase by the equivalent of 1% for every 9 weeks you defer, which works out as just under 5.8% for every 52 weeks.

Although that might sound appealing, it will actually take quite a few years to ‘replace’ the pension you didn’t take – by my calculation, around 17 years. I discussed this a while ago in this blog post. In brief, though, I don’t recommend deferring for most people, unless perhaps you are in a well-paid job, and claiming the state pension on top would result in hefty tax charges. If that’s the case, I recommend seeking advice from a financial adviser or an accountant.

If you aren’t sure what date you will qualify to receive the state pension, if you enter your date of birth on this government website it will tell you.

If you want to know how much you are on track to receive (at current rates) this government website can give you that information (although you will need to provide proof of ID to use it). I also wrote a blog post on this subject. One important point is that if you don’t have enough National Insurance contributions on your record to qualify for the full new state pension, you may be able to make extra voluntary NI contributions to top up. If you are in this position, it will almost certainly be worth your while to do so.

I hope you have found these thoughts of interest, especially if you are approaching state pension age yourself. As always, if you have any comments or questions, please do leave them below. Bear in mind that I am not a qualified professional financial adviser, however, so cannot give personal financial advice.

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Applying for the Higher Rate of Attendance Allowance

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I recently helped an elderly friend apply for the higher rate of Attendance Allowance. She was already receiving the lower rate, but sadly suffered a stroke which badly affected her balance and mobility.

As Pounds and Sense is aimed especially at older people (and those caring for them) I thought it might be of interest to describe what the process involves and my personal experiences with it. But first, let’s recap on the basics.

What is Attendance Allowance?

As I said in my original blog post about Attendance Allowance, this is a UK welfare benefit available to people who have reached state pension age who need help caring for themselves due to illness or disability. If you haven’t yet reached state pension age, the equivalent benefit is Personal Independence Payment or PIP. It is thought that millions of older people who would be eligible for Attendance Allowance are not currently receiving it.

How Much Is It?

Attendance Allowance is paid at two different rates according to how much help and care you need.

The lower rate (currently £60 a week) is paid to people who need care through the day OR night

The higher rate (currently £89.60 a week) is paid if you need care through the day AND night, or if you are terminally ill.

Payments are normally made every four weeks direct to your bank account. The money is yours to spend as you wish to make your life a bit easier.

It is worth noting that you do not need to have someone currently caring for you in order to claim. Eligibility is based on your need for care rather than whether you are actually receiving it.

Another important point is that Attendance Allowance is not means-tested – eligibility is based purely on your care needs. Also, it is not taxable and will not normally affect your entitlement to other welfare benefits. Indeed, you may also be eligible for extra Pension Credit, Housing Benefit or Council Tax Reduction if you receive Attendance Allowance.

Attendance Allowance is administered by the Department for Work and Pensions (DWP) rather than local councils. In Northern Ireland the Department for Communities (DfC) has responsibility for it.

There is a long (31 pages) and detailed application form. You can either download this from the government website or you can phone them on 0800 731 0122 and ask for a form to be sent to you. In Northern Ireland you can download the form from this site or phone the Disability and Carers Service on 0800 587 0912. You can apply yourself or someone else can apply on your behalf (with your permission, of course).

Applying for the Higher Rate

Most people first applying for Attendance Allowance are awarded the lower rate. This is because they need help and support during the day but not (normally) at night. But of course – as in the case of my friend – that can change if your condition worsens.

If you – or the person you’re caring for – regularly need help during the night as well as the day, you may become eligible for the higher rate of Attendance Allowance. This also applies if you are diagnosed terminally ill (someone is classified as terminally ill if they are not expected to live longer than six months).

Anyway, after my friend had her stroke and received her diagnosis (this was delayed by a few weeks for reasons discussed below), I realised that she should now be eligible for the higher rate. Because of her reduced mobility and balance problems she now needs help getting to the bathroom at night, which previously she could manage herself. She also needs help taking medication at night, and so forth. All this means she does now regularly require assistance during the night as well as the day. So I phoned up the DWP Attendance Allowance helpline on the number above.

I spoke to a helpful young woman who asked me a few questions about my friend and how I was connected to her. I explained that I was an old family friend and had originally helped her apply for Attendance Allowance two years earlier. She accepted this without a quibble. She then asked me a few questions about my friend and why she (and I) believed she might now be eligible for the higher rate. I explained that – as stated above – due to her stroke she now required support at night as well as during the day.

The official told me she would be sending my friend a couple of forms to fill in. She reassured me that these were not as long as the original AA claim form, which I was pleased to hear. She said once they had received these they would re-evaluate her application. She cautioned me that this could result in her allowance being reduced as well as increased, which I duly noted.

Completing the Forms

I was told the forms could take up to 10 working days to arrive, but in fact they turned up at my friend’s house the next day. The form reference numbers were DBD420 and DBD138.

Form DBD420 comprises 5 pages. The first three pages are actually a letter explaining what you need to do with this and the other form. On pages 4 and 5 you are asked to explain why you are asking them to look at your application again. You are also asked why you didn’t get in touch sooner if your circumstances changed before the date you contacted them (shown on the form). This is an important point, so I’ll say a few more words about it now.

Unless you have a terminal diagnosis, you won’t become eligible for the higher rate of AA until six months after the change in your condition occurred. This is obviously somewhat arbitrary and you could argue that it is unfair, but that’s the rule. So it is important to contact DWP as soon as possible after your condition worsens, even though this may not be your top priority if you have just suffered a stroke 😮

In my friend’s case, she didn’t get an immediate diagnosis as the initial hospital tests were inconclusive. She therefore had to go back as an outpatient for an MRI scan. There was then a wait of several weeks until she got a letter confirming she had indeed suffered a stroke. I felt it would be best to wait until she had a definite diagnosis before applying for the higher rate of AA. In retrospect that might have been a mistake, although it’s hard to say for sure. But anyway, form DBD420 let’s you explain the reason there may have been a delay in applying, so we provided details as above. We also enclosed the diagnosis letter my friend (eventually) received.

The other form is DBD138. This is 11 pages long. I won’t go into detail about it here, but essentially it asks for information about your medical condition/s and – crucially – what help you need during the night and how many times. Inevitably this caused us a bit of head-scratching, but we filled it in to the best of our ability. It is important to note that you DON’T need to require constant watching over at night to qualify for the higher rate of Attendance Allowance. There must be a regular requirement for help at night, though – it can’t just be a one-off. Night is defined on the form as ‘when the household has closed down at the end of the day’ which made us think a bit of Downton Abbey 🙂

The Outcome

We sent off the forms in the reply-paid envelope provided. After three weeks my friend received a letter from DWP which was basically just an acknowledgment of the original query. Then the next day, rather to our surprise, a longer letter arrived confirming that her application had been reviewed and she was now eligible for the higher rate of Attendance Allowance.

The start date for the higher rate was six months after the date she suffered her stroke, which is what we requested on the form. Obviously, I was pleased about this and so was my friend. Although the extra money won’t compensate her for the loss of mobility she has suffered, she will be able to use it to pay for things that will make life a little more comfortable for her going forward.

If you (or someone you know) find yourself in a similar position to my friend, I hope you will find these notes helpful. As always, if you have any comments or questions, do post them below. But please bear in mind that I am not a trained welfare worker or financial adviser. If you need in-depth help, I would try Citizens Advice or an organization like Carers UK.

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How Much Should You Draw From Your Pension Pot in Retirement?

How Much Should You Draw From Your Pension Pot in Retirement?

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Today I’m addressing an issue that will be critical to many people approaching (or in) retirement. That is, how much to draw from your pension pot (and other investments) to supplement your state pension.

I’ll start by telling you about a conversation I had recently that made me think about this…

Talking to Mike

A few weeks ago I had my annual review with my financial adviser, Mike (if you want to know why a money blogger needs a financial adviser, you can read my post about this here). It was done by video call on this occasion, naturally.

One major topic of conversation was the fact that later this year (God willing) I will reach my 66th birthday and start receiving my state pension. I should qualify for the full state pension, which from April 2021 will be £179.60 a week or £9,339.20 a year.

As Mike pointed out, when you add this to my other income from this blog, my small private pension, other investments and my solar panels, this will put me in quite a strong financial position. So he recommended that at that time I reduce the amount I draw from the other investments or even stop taking anything at all and let them carry on growing year by year (financial downturns  permitting).

I could see where Mike was coming from. If I don’t actually need the money it might be sensible to leave it all where it is. For both practical and psychological reasons, however, I told him I don’t want to do that. Here are the two main reasons I gave him:

1. If I take no income from my investments, I will still be somewhat dependent on my blog for income. While I have no plans to stop running Pounds and Sense at the moment, I don’t want to have to rely on it to cover my outgoings as I grow older. Also, the income from my solar panels will end in about ten years – possibly sooner if there are any major technical issues (or I move).

2. I don’t have any particular beneficiaries I wish to leave my money to (I live alone since my partner Jayne died a few years ago and we didn’t have children). I don’t therefore see any merit in accumulating a large ‘pot’ that simply goes to benefit my sisters (much as I love them). I would rather enjoy the money while I can, while aiming to ensure that it lasts me out.

I told him my plan was therefore to reduce my withdrawals to a sensible level where my capital should be preserved and hopefully continue to grow a little. Four percent is a common rule of thumb for this, so I am looking at that as a starting point (though willing to accept Mike’s expert advice on the exact level). I plan to review this every year, based on my needs and circumstances and how my portfolio has been performing.

If I have more money coming in than I require, I don’t see that as a problem. I will spend it (maybe on a few extra holidays), save it or reinvest it, and maybe give some to charity and/or friends/relatives who are in need. As they say, you can’t take it with you, so I have decided that will be one of my guiding principles going forward!

I shared these thoughts in a subsequent email to Mike but haven’t so far received a reply from him. If I do, I’ll update this post accordingly 🙂

That Crucial Question

I am obviously not alone in facing a decision of this nature. With most people nowadays relying on a pension pot to finance retirement rather than a guaranteed lifetime pension, many of us will have to grapple with the question of how much income we should be withdrawing to supplement the state pension.

  • And yes, I know the state pension will continue as long as we need it. But while it is obviously an important source of income for most people in retirement, it is nowhere near enough to finance a comfortable retirement on its own.

Of course, none of us comes with a sell-by date. Pension planning would be so much simpler if we did. If we knew the exact date we were going to expire, we could plan our retirement precisely.

So if I knew I was going to die in five years, I could live the (moderately) high life, burn my way through my savings and investments, and leave just enough for my relatives to pay for my funeral!

On the other hand, if I knew I could look forward to another thirty years, that would of course be wonderful, but I would need to plan carefully to ensure my pot didn’t run out before I did. But as none of us knows how long we have on this planet, a long-term strategy is the only sensible option really.

The question of how much to draw from your pension pot (and other investments if any) therefore needs very careful thought. In particular, the following considerations may apply:

  • It’s clearly sensible to try to ensure that enough money will remain in your pot to see you through to deep old age (e.g. 100).
  • If you’re keen to pass on a legacy to your children (or some cause dear to your heart) you will need to be more cautious about how much you withdraw.
  • On the other hand, if you aren’t so worried about passing your wealth on, then there is no point in depriving yourself now.
  • Tolerance for risk is another factor. If you worry that the 4% rule is too chancy, you could reduce your withdrawals to 3% or less.
  • There may be other considerations too. For example, if you have a life-limiting medical condition, that may alter the equation in favour of a more bullish approach.
  • There is also the matter of whether you own your home. If so, you will have the scope to raise extra money if needed by downsizing or using equity release.
  • Tax may be an issue as well. The state pension counts as taxable income and so do most private pensions. If the total amount you draw exceeds your personal allowance, you may have to pay tax on it. This is something you might want to discuss with a financial adviser.
  • And finally, if you have a particular ambition or goal you wish to achieve during retirement (going on a world cruise, for example), you will of course need to ensure enough money is set aside to cover that when the time comes.

As mentioned above, a common rule of thumb is that to provide the best chance of preserving the value of your investments, you should limit withdrawals to no more than 4% of your capital per year. So if, for example, you have a pension pot of £50,000 and draw 4% annually from that, that would be £2,000 a year or about £167 a month. Drawing that would hopefully ensure that the value of withdrawals is on average balanced out (at least) by growth in the value of your investments.

  • Of course, the 4% rule is only a rough guide and needs reviewing regularly according to how your portfolio performs.

When pension freedoms were introduced in 2015, there was some concern that people might ‘blow’ their pension pot on a luxury car or a yacht, but actually I think the vast majority of older people are more sensible than that. Indeed, I think the opposite mistake is more common – people drawing too little and leading a life in retirement that is unnecessarily frugal rather than enjoying the money they accrued during their working lives. But in any event, this is a question we all need to think very carefully about as we attempt to chart a balanced course into retirement and old age.

So those are my thoughts on this important subject (one I know many people don’t really like to think about). But what is YOUR view? Please post any comments or questions below as usual

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