HomeHere at Investment Sense not only are we passionate about making sure you get the best possible result from your pension savings, we also like to offer practical help and ideas that actually make a difference.
We are specialists in what is known as the ‘At Retirement’ market, that is to say we help many of our clients convert their pension savings into income.
As this guide shows, there are many ways to do this. We are proud members of the ‘Offer More Options’ campaign, promoting, as the name suggests, the concept of not only shopping around for the best Annuity rate, but also considering all retirement income options.
However, we find that whilst more and more people are realising the value of advice and researching more options than just an Annuity, there are many things that could have been done in the years leading up to retirement that would have improved the income available.
Here are a few practical steps you can take to help you maximise your retirement income.
1. Take another look at how your pension is invested
We see many clients who have remained invested in equity based funds, also known as stocks and shares, right up until the day that they want to start taking an income from the pension.
There are countless times when we have seen an individual want to purchase an Annuity only to find that they are getting a lower income than they might have previously done because the stock market, and therefore the value of their pension, has fallen.
In the five years leading up to the time when you are likely to take an income from your pension, in whatever format you choose, take time to carefully consider how it is invested.
Remaining in equity based funds may be the right thing to do. However, as a general rule of thumb, the more likely you are to purchase an Annuity, perhaps because of the size of your fund or desire to avoid the risk associated with Income Drawdown, the more you should consider moving to safer investments.
Our advisers would be happy to get a State Pension forecast for you
Contact our team of advisers today:
0115 933 8433
2. Remember the State Pension
The State Pension can be an extremely valuable source of income, but we find many people do not know how much they will be entitled to until they reach the State Pension age.
Even worse, although perhaps understandably with all the changes which have taken place, some people don’t even know what their State Retirement age is.
The State Pension may be derided by many; however it can form a significant part of your income in retirement and should be included in all planning. It is also index linked, and will rise in line with inflation, earnings or 2.5%, whichever is higher, making it even more valuable.
It makes sense to check that you have paid sufficient National Insurance to qualify for a full State Pension.
Of course you could just call us and we’ll happily do the hard work for you.
3. Use the information you get about your State Pension carefully
So, you have found out what your State Pension will be, what next?
If you do not qualify for a full State Pension consider whether it is worth making additional National Insurance contributions.
Now consider how the amount of State Pension that you will be entitled to affects other income.
For example, we see many situations where a couple have a State Pension and other pensions, whether they be private or occupational, but these are all held by one of the couple, usually the husband, with the partner having no pension provision. This is not tax efficient, the partner with no pension will not use their Personal Allowance and the partner with the pensions will be paying more tax than is necessary.
Having pensions held by one person can be expensive. In the 2012/13 tax year, the Personal Allowance i.e. the amount that can be earned without paying tax, is £8,105 if you are below 65, £10,500 if you are aged between 65 and 74 and £10,600 if you are 75 or older. Assuming a 20% tax
rate, having all the pensions held in one person’s name, with the other person’s allowance going unused, could result in an up to £1,621 extra tax being paid, and that’s just in one year.
In an ideal world both husband and wife would use their full Personal Allowance, ensuring that income is arranged as tax efficiently as possible.
It is not possible to transfer pensions from one person to another, except on divorce. However there are ways, such as reallocating contributions from one person to the other, to try and equalise pensions so that your income in retirement is more evenly split and therefore more tax efficient.
4. Consider paying more into your pension
This might sound like an obvious piece of advice and not particularly imaginative, but take a step back and consider the benefits.
It’s true that the closer to retirement the additional contribution is made, the less time it will have to grow, but consider the tax relief benefits. As you probably know, contributions to your pension are eligible for tax relief, meaning that for a basic rate tax payer, for every £80 personal contribution that is made; £100 is credited to the pension, the £20 difference being tax relief.
If you are a higher rate tax payer, even more can be claimed.
There are of course disadvantages to a pension, however the tax relief that contributions are eligible for can make them look very attractive, indeed, we see many people making quite sizeable contributions just on the strength of the tax relief that is available.
Further contributions could also be the answer to balancing up pension provision between spouses or partners. If one spouse will not fully use their personal allowance in retirement, consider making pension contributions in his or her name. To obtain tax relief he or she will need to have earned income of their own. Serious consideration should be given to in whose name pension contributions are made.
Five golden rules to help you get a better Annuity – watch now
5. Avoid any nasty surprises
If you decide that an Annuity, in whatever format, is the right choice for you, it can take some weeks to shop about for the best rate and put the Annuity in place, especially if you do it by yourself.
During this time, if you are invested in an equity based fund, we would strongly suggest that you consider switching into a Cash or Deposit based fund to minimise any nasty surprises. Nasty surprises such as the Eurozone crisis or the Japanese Tsunami tend to creep up on us without warning and could have a detrimental effect on your pension fund, especially if you are invested in equities, just when you need it most.
Most pension providers offer a Cash or Deposit fund, which will provide a short term safer haven for your money whilst you make up your mind about the best thing to do.
Yes, the market may increase whilst you are invested in Cash, but it could equally move downwards. A reduction in value is far more dangerous; after all, you are potentially stuck with the results of a fall in share prices for a very long time.
6. Plan, plan, and plan some more
All of the steps outlined above, along with making the right decisions when you do actually retire, will help you increase your income in retirement.
However, you need a coherent, considered strategy to get the best income possible in retirement and to work out exactly which of the steps outlined are right for you.
An Independent Financial Adviser can be invaluable when it comes to helping you plan your retirement strategy, and it needs just this, planning, the more planning you do, the better the result will be.
Next steps
Our team of Independent Financial Advisers in are experienced in developing retirement income strategies for clients the length and breadth of the UK. If you are approaching retirement and would like advice on your options call one of our IFAs today on 0115 933 8433, alternatively enquire online or email info@investmentsense.co.uk
Further Information
Options
Lifetime Annuity
Investment Linked Annuity
Fixed Term Annuities
Income Drawdown
Phased Retirement
Steps to consider leading up to retirement
