Back in September 2020, we looked at how to make your grandchild a millionaire, and at number three on our list was “start a pension”.
Pensions are a hugely tax-efficient way to save for your retirement but deciding how much to put aside, and when, can be difficult. And the decisions don’t stop there.
As your chosen retirement date nears, you’ll need to start thinking about the pension option you’d like to take. Even then, the hard work isn’t over. Managing income in retirement – ensuring you have enough to live the lifestyle you want without running out – can be a difficult juggling act.
Thankfully, Fingerprint are on hand to help you through every stage of your retirement journey, from that first contribution to planning what you intend to leave behind.
Keep reading for your guide to managing a pension, then take our quiz to find out how prepared for retirement you are.
When do you need to start thinking about retirement?
As we discovered back in September, starting early is the best way to ensure a stable financial future, whether for you or a grandchild.
If you haven’t yet thought about your retirement, now is the time to ask yourself some key questions:
- When do I want to retire?
- What will my retirement look like?
- How much will that cost?
At Fingerprint, we use cashflow modelling to take a holistic view of your finances, helping you to decide how much you can afford to contribute and how much you’ll need to make your retirement dreams a reality.
Contributing early has several benefits. Not only does it increase the number of overall contributions you can make between now and retirement, but your contributions also benefit from the effects of compound growth.
We can help you put a plan in place to help you feel more in control, but we also understand that priorities can change. Our regular reviews will help to ensure your plan remains on track and that it always aligns with your long-term goals.
Your retirement options
You’ll have several important decisions to make at retirement, all with long-term consequences. It is never too early to start thinking about the right choice for you.
Before the introduction of Pension Freedoms in 2015, an annuity was the go-to option at retirement.
You can usually take up to 25% of your accrued defined contribution (DC) pension pot as tax-free cash, with the remainder used to buy a guaranteed income.
You decide on the basis of payments – the frequency, and any additional benefits such as a spouse’s pension or an increasing income designed to combat inflation – and they continue for the rest of your life.
If you have a spouse’s pension or guaranteed period, the payments may continue even after your death.
This retirement option isn’t flexible, but the stable income means that budgeting is much simpler than with more complex, flexible options. If you expect to have regular, known expenses in retirement, an annuity could be a great way to cover them.
Uncrystallised fund pension lump sum (UFPLS)
You also have the option to take your whole pension pot in one go, or as a series of lump sums. As with an annuity, 25% is available tax-free, with the remainder taxed as income at your marginal rate.
If you anticipate having large, one-off expenses in retirement – such as world travel or home renovations, for example – a one-off sum might be one way to afford them.
Remember that your retirement fund is designed to provide you with an income for the whole of your retirement, so you’ll need to manage your budget carefully.
Speak to us if you are contemplating this option. Large one-off payments could have tax implications, including pushing you into a higher tax bracket.
If you are comfortable managing your own income in retirement, you might opt for flexi-access drawdown.
You can take up to 25% of your pot as tax-free cash and leave the remainder invested, to withdraw as and when you wish.
This can be great for covering discretionary expenses and one-off luxuries, but only if your fixed expenses are covered elsewhere.
Managing your remaining pot can be tricky – especially during periods of market volatility – so be sure to speak to us if you think you might choose this option.
Also, be aware that you don’t have to stick to just one choice. You might opt for a combination, using different options to cover different types of expenses.
Planning your estate
Finally, be aware that you don’t have to take your retirement pot at all. Unused pension funds remain outside of your estate for Inheritance Tax purposes and can be a tax-efficient way to pass on wealth.
You’ll need to speak to your pension provider to choose a beneficiary. On death before age 75, 100% of your pot will pass to the beneficiary you choose. If you die after age 75, your beneficiary will still receive funds, taxed at their marginal rate.
If you have multiple schemes, you might earmark one to leave until last – or not take at all – allowing you to pass it to the next generation on death.
Take the Fingerprint “Are you ready for retirement?” quiz
You might be making regular pension contributions and have your dream retirement all planned out. Maybe you are happy making the minimum auto-enrolment contribution and haven’t considered your retirement date at all?
Either way, it pays to speak to the experts. Take our Fingerprint retirement quiz now and find out how prepared you are for retirement.
Get in touch
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of, and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.