Nearing retirement and wondering what to do with your pension pot?
You may have always planned on retiring at a certain age and being able to relax and enjoy travelling and hobbies. Most people are eligible to receive the state pension from the age of 67, and it’s worth bearing in mind that the standard new state pension is currently £179.60 a week, or £9339.20 a year (Source: DWP, 2022), when considering the sort of retirement you’d like to have.
The Government has more recently encouraged pension saving with the introduction of auto enrolment schemes to help people top up their state pension. In many cases, these types of pensions can be accessed before the state retirement age, often from the age of 55; however from 2028 the minimum age to do so increases to 57. Whilst it may seem appealing to access your additional funds earlier there are a number of things we would recommend you consider.
So what are your options if you want to access your pension pot?
There are a number of things to consider before you take this step, bearing in mind that the average Scottish life expectancy at birth is 76.8 years for men and 81 years for women (Source: National Records Scotland). That means if you start to use your pension pot from the age of 55 it will need to support your regular outgoings for many years.
- Consider your current standard of living and costs to give a rough idea of how much money you would need annually.
- Do you have any other investments or assets that you may use as sources of income?
- Will you continue to live in your current home, or are you likely to downsize? Would funds from a property sale support your retirement or be passed on to any dependants?
- Do you plan to continue to work, even if not in the same role or for the same number of hours?
Once you have an idea of how much you’re likely to need to live on annually and any additional revenue sources, you can then start to consider what to do with your pension pot. There are a number of options available, but bear in mind that not all options may be available for your pension policy.
Delay retirement or accessing your pension pot.
There may be the option for you delay accessing the funds. If you choose this option your pension pot will still benefit from tax free growth potential. Additionally if you want to continue to make contributions to you pension pot you can do so and still potentially obtain tax relief on your premiums.
Buy an annuity to guarantee your retirement income.
You can use money from your pension pot to buy an annuity which will provide a regular, and most importantly guaranteed income during retirement. You can usually access up to 25% of your fund as a tax free lump sum with the remainder used to purchase the annuity. The full balance can be used to buy an annuity for life, alternatively you can purchase a fixed term annuity for a number of years with a fund value remaining at the end of the term.
This is another way to provide retirement income where you move your pension fund into a drawdown plan from which you can withdraw funds. You can normally take up to 25% of the fund as a tax free lump sum, leaving the remaining sum invested, with the potential for future tax free growth. You can withdraw funds from your pension pot as and when you want to, but after you have taken the full tax free allowance any additional withdrawals will be taxable.
Taking a number of ‘lump sums’ or Uncrystallised Funds Pension Lump Sum (UFPLS)
With this option you take lump sums as and when you need them until you empty your pension pot or choose one of the other options we’ve mentioned previously. With each lump sum taken the first 25% is tax free, any sum above that is taxed as earnings. The remaining funds in the pension pot stay invested. The full fund value can be taken as one lump sum however there can be significant tax implications when selecting this option and it is one rarely chosen.
Phased retirement allows you to control your retirement fund and convert it gradually over a number of years into income. This control is achieved by setting up many contracts (often more than 1,000) and using a number of them each year to provide you with your desired level of income. This income will be made up of part tax-free cash and part annuity. The annuity provides ongoing income for life. The balance of your pension fund (i.e. the contracts not cashed in or ‘vested’ to provide you with income) continue to be invested, thus providing you with the possibility of higher future income
A mixed portfolio of these options
Depending on your individual circumstances, a combination of the above could be used to spread investment risk whilst providing a mix of flexibility and guaranteed income.
As we’ve outlined there are a number of options available, and your choices are best matched to your individual needs, circumstances and investment risk appetite. Our Financial Services team can help you identify what your retirement income needs are and help tailor managing your pension pot to meet these needs.
The value of pension funds and the income from them can fall as well as rise and is not guaranteed.
You can find out more about our services, the team, and book a face to face, telephone or virtual appointment here: https://www.raeburns.co.uk/services/private-law/financial-services/pensions/