For some workers, 2020 will be a milestone year – not just as it marks the start of a new decade, but because it’s the year they finally retire.
Whether you’re excited or daunted by the prospect, if you have a defined contribution (DC) pension, there may be several options to weigh up when making decisions about your retirement income.
Jonathan Watts-Lay, director at WEALTH at Work, a specialist provider of financial education and guidance in the workplace, says: “Many workplaces now offer support to their employees in terms of financial education, guidance and advice, so it is worth speaking to employers to find out what help is available.”
To help with the transition towards retirement, WEALTH at Work shares the following 10 tips…
1. Pensions are not the only source of income in retirement
When it comes to retirement, there are many assets, such as Isas, shares and general savings, which can be used as potential sources of income in addition to your pensions. It is beneficial to work out which assets you have, what they are all worth, and the best way to use them to make sure you are not paying unnecessary tax.
2. Consider how much you may need in retirement
Work out how much income you are going to need in retirement, including essential income to meet your day-to-day living expenses such as household bills, and discretionary income for holidays and hobbies.
Don’t presume it is the same as your salary. It may be possible to have the same disposable income in retirement as when you were working, even if your pension income is less than half your salary.
This is because when you retire, you may be paying less income tax, loans such as mortgages may have been paid off, and children are more likely to be financially independent.
3. Think about how to access your pension income
If you have a DC pension, there are different ways to access your savings. This could be through income drawdown, buying an annuity (a regular retirement income), taking it as a cash lump sum, or a combination of these options.
Help and support is available to help you understand which might be best for you. Speak to your employer about any support that they provide, such as financial education and/or access to regulated financial advice. You can also receive free and impartial guidance from Pension Wise (pensionwise.gov.uk).
4. Shop around
Make sure that you shop around before you purchase any retirement products. It is important to not only check fees, but make sure it suits your needs, and that you can withdraw cash as and when you want it, and for as long as you need it.
5. Don’t pay unnecessary tax
Generally, the first 25% of a DC pension is tax-free and the remaining 75% is taxed as earned income. But some people may find themselves paying more tax than they need to. For example, some people may have taken their pension as a cash lump sum, not realising that it made them a higher rate taxpayer.
People’s circumstances vary, but it may be more tax advantageous to take income from your non-pension savings first. You may be better off taking a smaller amount each year from your pension and topping it up with withdrawals from your Isa.
6. Can you really afford to retire right now?
Do you have enough put aside to be able to afford to retire, or do you need to work a little longer, or perhaps part-time? Research suggests many people live longer than they expect they will, so keep this in mind when doing your sums. Some people may live for 20-30 years beyond state pension age.
7. Make sure your pension beneficiary details are up-to-date
Ensure everything is in order as you would wish it to be.
8. Regulated financial advice can be an investment
An adviser will look at all of your assets, work out the most tax efficient way for you to fund your retirement and then put a bespoke plan in place for you, which will support you throughout retirement.
9. Protect yourself from scams
Scammers often use highly professional looking websites and marketing literature to lure you in, and may sound legitimate when they contact you.
10. Finally, choose what is right for you
Losing your life savings to scams, paying more tax than necessary, or running out of money during retirement are real concerns. Make sure you fully understand all of your options, so you are able to make informed decisions that best suit your lifestyle choices and needs.