We want to make 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 and we help many of our clients convert their pension savings into income.
As this guide shows, there are many ways to do this and a different solution is required for each and every individual.
However, we find that whilst more and more people are realising the value of advice and researching wider options than just an Annuity, there are many things that could have been done in the months and years leading up to retirement that would have improved the income available.
Here are just a few practical steps you could take to help you maximise your income in retirement.
#1: Take another look at how your pension is invested
We see many clients who have remained invested in equities, 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 who wants to purchase an Annuity, only to find that they are getting a lower income than they might have previously done, because the stock market has dropped, and therefore the value of their pension has fallen.
In the five years leading up to the time when you are likely retire, take time to carefully consider how it is invested.
Remaining in equity based funds may be the right thing to do. However, as a 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 Flexi Access Drawdown, the more you should consider moving to safer investments.
#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.
Even worse, although perhaps understandably with all the changes which have taken place, some people don’t even know what their State Pension 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 also 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 PAYE 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.
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 taxpayer, even more can be claimed.
There are of course disadvantages to a pension, although Pensions Freedom has addressed many of these problems. 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.
#5: Avoid any nasty surprises
If you decide an Annuity 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 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: Budget carefully
Clients often ask us if their pension fund is ‘enough.’
It’s not a question we can answer because everyone has different financial aspirations and needs. A great starting point is to sit down with your bank statements and make a list of all outgoings from your household income; split it down into essentials, lifestyle and luxury. Then it’s a case of having a look at how closely your income is going to match your outgoings and if there is a shortfall, then what you cut back on.
#7: Take advice
There is no substitute for good solid financial advice with an adviser who will run through all your options and the pros and cons of each. Some of the decisions you may make are irrevocable so it’s important they are right.
#8: Plan, plan, and plan some more
All the steps outlined above, along with making the right decisions when you do 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.
Pensions Freedom – A summary of the key changes
Pensions Freedom – Key questions answered
Delay taking your pension
Investment Linked Annuity
Fixed Term Annuity
Uncrystallised Funds Pension Lump Sum (UFPLS)
Purchased Life Annuities