Pensions Freedom and Pension Choices – Your Pension Explained.
If you’re affected by the changes to private pensions, then you have a number of options available to you on retirement. The main change is that you’re no longer obliged to buy an annuity. Instead, you can take your money as a lump sum or leave it invested and withdraw money when you need it.
There are lots of factors to consider: do you want the certainty of a guaranteed income or the increased flexibility of choosing how to invest your money? You’ll need to consider your lifestyle, family, age, life expectancy, care needs and other sources of income too.
Planning for retirement? It pays to think ahead
Up to 10 years until retirement
Your living costs – Work out what you’ll need/want to live on in retirement. Make an allowance for extras such as increased utilities, bills and perhaps more frequent holidays. Don’t forget to exclude things like mortgage payments and travel to and from work.
Do the maths – Add your pensions together to see if there’s a shortfall.
Get statements – Ask past providers or employers for up-to-date pension statements. Get a forecast of your State Pension through the GOV.UK website.
Then what?
- Can you save more?
- Investigate ways of paying in more.
- Are your current savings working hard enough?
- Even 0.5% can make a difference.
- Check out the new auto-enrolment scheme – it’s usually worth starting.
Up to 5 years until retirement
Things to consider
- Consider moving any stock-market investments (including pensions to safer havens to avoid losing out if there are any last-minute falls.
- Get another State Pension forecast.
- Check your National Insurance contributions are up to date
- Pay off your debts.
Make a will – Ensure your family is catered for and avoid expensive legal fees later.
Looking at the detail
- Further increase savings towards retirement if you can, unless doing so will affect any means-tested benefits you are entitled to.
- Track down your old pensions and any other accounts.
- Start investigating Annuities.
6 months until retirement
Last checks
- Find out what your final pension will be and how it will be paid to you.
- Make an appointment with a specialist independent financial adviser for advice on getting the most income out of your pensions.
- Tell the adviser if you are in ill-health or smoke – this could mean more income.
- Tell the taxman – it will affect your tax code.
No more NI – Tell your employer – once you are over State Pension age, you do not need to pay any National Insurance contributions.
Get free travel – Contact your local authority to register for free travel – it’s available on retirement nationwide.
What happens next? – At least 4 months before retiring, you should receive a pack telling you how much State Pension you’ll receive. If you are deferring taking your State Pension, follow the advice on the GOV.UK website.
The state pension age is currently 65 for men and gradually increasing for women from 60 to 65 – it’s 62 and a half from April 2015.
From December 2018, it will start to increase for both men and women to reach 66 by October 2020. The government is planning further increases, which will raise the state pension age from 66 to 67 between 2026 and 2028. They will then review it every five years in line with life expectancy.
You can check your pension age by calling Age UK Advice or using the GOV.UK state pension calculator.
You have the following options when considering your pension pot:
1. Take a cash lump sum
Retirees with small pension savings have always been able to take it all as a lump sum rather than having to buy an annuity, but the new changes will give you more freedom to access your pension pot no matter what size it is. You can either take it all as a single lump sum, or withdraw it in stages.
Only 25% of each withdrawal will be tax-free. The remaining 75% will be taxed at your highest rate of tax, and it may also push you into a higher tax bracket. You also need to consider the effect of withdrawing money on your future pension provision and on any means-tested benefits you claim now or will claim in the future.
You may benefit from a lump sum payment if you have outstanding debts or an interest-only mortgage to pay off. Seek advice if you’re considering this. Remember that you don’t have to rush into any decisions.
2. Buy an annuity
While it’s no longer compulsory to buy one, an annuity may still be the best option for you. This converts your savings into an annual pension, giving you a guaranteed income for life. If you want, you could take some of your pension pot as a lump sum before buying an annuity with the rest.
Annuities have had some bad media coverage because of low interest rates and fees can be high. You were also stuck with your annuity for life, meaning you couldn’t take advantage of newer products with more attractive rates. However, from April 2016, you will be able to change your mind and sell back your annuity for a lump sum.
3. Choose an income drawdown scheme
In a drawdown scheme, you transfer your pension pot into a scheme which is then invested on the stock market. You can then take regular income from it to fund your retirement.
This can be an attractive option if you have a large pension pot, but there are expensive fees, your income isn’t a guaranteed amount, and your investment could decrease as well as increase depending on the stock market. There is also no limit on how much you can withdraw annually, meaning you could run out of money quickly if you’re not careful.
Whichever option you’re considering, make sure you take independent advice before deciding what to do with your money.
If you moved between jobs while working you may have a pension with more than one employer. Find out how to track down and claim your money.
The Pension Tracing Service is free and can help you trace a pension that you’ve lost track of, even if you don’t have the contact details of the provider.
All you need to know is the name of your previous employer or pension scheme. But if you can, collect as much information as you can find about the employer:
- any previous names it had
- the type of business it ran
- whether it changed address
- and when you belonged to the scheme.
Ensuring you have all these details, call the Pension Tracing Service on 0845 600 2537 who will check your information against its database of pension schemes.
They should be able to give you details of the pension’s administrator – you then need to contact the pension administrator to ask for your pension to be paid.
Or you can send an online form directly to Pension Tracing Service.
