The Advantages of Professional Financial Advice

Retirement can be a time to indulge yourself if you plan it well in advance.

Travel to a dream destination; learn a skill that you always wanted to or fulfil other wishes that you never got time to attend to.

However, you still have one important decision to make. In fact, it may well be the single most crucial decision that you will make for the rest of your life.

What should you do with your pension pot that you have accumulated after years of working hard and making sacrifices?

Decisions regarding retirement income were always a complex one. It has become all the more complex after the new pension freedom rules came into effect in April 2015.

If you are at that juncture in life and are unsure about which way to go, then it’s time to seek professional financial advice.

Why You Must Get Help

You will have to decide how you are going to use your pension pot. And there are a lot of different options. Some are simple, others are complex. But not all of them will suit your financial circumstances and your attitude to risk.

To add to this, there are many questions which you need to answer to be able to make the right decision.

Do you know what questions to ask?

Further, do you know what option to choose if you get the answers to these questions?

  • There are more options than ever. You can take larger sums in cash or choose to invest outside the pension. Some of these choices may be risky if you are not too careful with it.
  • If you are not aware of all your options, you may well buy a poor value annuity which may leave you with a much lower income than what you are eligible for.
  • If you choose to leave your money as cash, you may receive dismal interest rates and may not maximize its complete potential
  • There are a large number of fraudsters who are out to make a quick buck via Pension scams. Most of them will try to take advantage of the ‘Knowledge-Gap’ that people have about the radical changes to the pension rules.

These are, of course, just some of the reasons why you must seek professional help. The most important reason is that you must be able to receive an income during your retirement years that will provide you with the kind of lifestyle that you wish for.

Free Professional Advice

The government now provides free financial guidance for retirees through the Pension Wise service. It is run by professional financial experts and volunteers who have considerable expertise and skill handling complex issues pertaining to pensions.

There are multiple ways to reach Pension Wise.

  • You can schedule a face-to-face appointment with them by calling on 0300 123 1047.
  • You can log on to their website and use their web chat function to speak to a financial expert
  • You can also call them on the above number and schedule a telephonic guidance session

While the pension wise service can be used as a good starting point that will be informative, it cannot be considered enough.

Read our post on Understanding Pension Wise.

A professional financial advice will be a paid service. Advisers are bound by a code to reveal to you beforehand what the service will cost and what advice will be covered.

According to the Association of Professional Financial Advisers (APFA), the average cost of professional advice will be around £150 an hour.

Is this cost justified or are you better off buying what your pension provider is offering you?

Think about it this way. If you spend this money now, you will receive sound professional advice that is tailored to meet your financial objectives and to match your personal circumstances.

Also, the financial advisor will ensure that they will clarify the pros and cons of each option that you have.

The ideal time to speak to a financial advisor is at least six months before you retire.

Are you looking for a professional financial advisor? Read our article, ‘How to Select a Financial Advisor’ for more information.

 

Guide to Annuity Jargon

If you find yourself at your wit’s end trying to figure out the meaning of certain ‘terms’ in your pension manager’s sales pitch, you are not alone.

A lot of retirees face the problem of having to deal with an abundance of technical jargon when they first speak to insurance experts.

Unless you work in an insurance company or are a qualified financial adviser or have read about these things, it is normal to be confused.

Here’s our guide that should help debunk these arcane terms about annuities.

  1. Annuitant: The annuitant is the person who purchases the annuity
  2. Escalating Annuity: A type of annuity in which your income increases by a set percentage every year which can be specified by you. The higher the percentage you select, the lower your monthly payout will be initially.
  3. Index-Linked Annuity: A type of annuity in which your income will rise in line with rising prices (inflation). Either the Retail Prices Index (RPI) or the Consumer Prices Index (CPI) is used as a reference.
  4. Compulsory Purchase Annuity: It was compulsory for every citizen to purchase an annuity before the age of 75. This rule was changed in April 2006. Hence, the term Compulsory Purchase Annuity is an obsolete one.
  5. Capital Protected Annuity: A type of annuity in which your entire pension pot will be returned to a nominated beneficiary in the event of your death before a set time period. The returned amount will be subject to 35% tax.
  6. Enhanced annuity: A type of annuity with higher rates offered to retirees who may have a shorter life expectancy due to certain medical conditions or lifestyle-related conditions. For example, people with cholesterol, cancer, those who smoke or those who have recently quit smoking may be eligible for it.
  7. Guaranteed Time Period: A specified time period (5 or 10 years) for which, your annuity payment will be paid even in the event of your death. You can choose whether you want the remaining payment to be paid as a lump sum or as a regular income.
  8. Investment Linked Annuity: A type of annuity in which one part of your pension pot will be used to provide you with a low minimum guaranteed payment. The remainder will be invested in funds and the further income provided will be variable.
  9. Joint Life Annuity: A type of annuity in which your dependent spouse, civil partner or children will continue to receive the annuity payment for the rest of their life or a set time period, in the event of your death.
  10. Single Life Annuity: An annuity in which you will be the only annuitant who will receive the annuity payments for life. The payments will stop upon your death. If you have selected a guarantee period, then the payment will continue till that period.
  11. Level/Fixed Annuity: An annuity where the income will remain fixed for your lifetime.
  12.  In advance: The type of payment frequency you select in advance. For example, if you select a payment frequency of quarterly in advance, you will receive your payments at the completion of three months.
  13. OMO (Open Market Option): An annuitant’s right to shop around to find the best annuity rate by seeking quotes from multiple annuity providers
  14. Payment Frequency: The frequency at which you receive your payments. Can be monthly, quarterly, half-yearly or yearly.
  15. Postcode Annuity: A specialized type of annuity which is offered on the basis of the area where you live. A postcode annuity is based on the thought that people living in poorer areas may have a shorter life expectancy and people living in a richer locality may have a longer life expectancy.
  16. Purchased Life Annuity: A type of annuity that is not purchased using the money in your pension pot. You can use your pension commencement lump sum or any other funds that you may have saved.

RELATED: Types of Annuities

Pensions and Tax Benefits

If saving for your twilight years does not seem motivating enough then the government is certainly doing its part to make it motivating for you.

Saving in a pension is one of the best ways to build up a retirement income in a tax-efficient manner.

Funds that go into your pension are looked upon leniently by the taxman. But there are annual as well as lifetime limits on how much tax relief you can get.

It pays to plan smartly and choose your options correctly to ensure that you maximize the benefits.

Understanding Tax Relief

In the year 2015-2016, the HM Revenue & Customs (HMRC) provides tax relief on pension contributions up to 100% of your earnings. The upper limit is £40,000.

To simplify things, here’s an example.

  • If you earn £25,000 and you contribute £30,000 into your pension pot by adding additional income sources, then you will only get tax relief on £25,000 (100% of your earnings)
  • On the other hand if you earn £80,000 a year and put the entire amount into your pension pot, you will only receive tax relief on £40,000 (The upper limit)

While you are enrolled in a pension scheme, you can carry forward unused tax allowances from the past three years.

However, if you are enrolled in a Defined Contribution Pension, then according to the new Pension reforms introduced in April 2015, then your contributions can be reduced to £10,000 in some cases.

The Money Purchase Annual Allowance

If a pension scheme member chooses to flexibly access the funds in their pension pot, it triggers the MPAA or Money Purchase Annual allowance which in effect, reduces the annual allowance to £10,000.

This means, if you take the tax-free cash or withdraw funds from the pension pot, you will then receive tax-relief only on £10,000 or 100% of your earnings, whichever is lower.

The MPAA has been drafted to prevent abuse of the flexibility options that a pensioner has.

Some situations in which you may trigger the MPAA are:

  • If you start to make random cash lump sums from your pension
  • If you invest in an income drawdown scheme and start to utilize the income

However, the MPAA limit only applies to defined contribution pensions.

Personal Pensions

If you have enrolled in a personal pension scheme then your income is taxed before your contributions are made into it.

You are eligible to get tax relief on up to 100% of your annual earnings.

The tax relief is automatically applied if your pension provider adds a 20% relief to your pension pot (relief at source).

You can claim additional tax relief if you pay above the basic rate of tax which is 20%.

For example:

  • If you pay 40% income tax, you can claim tax relief on the extra 20%.
  • If you pay 45% income tax, you can claim tax relief on the additional 25%

This claim can be made via a self-assessment form at the end of each tax year.

Company or Workplace Pensions

If you are enrolled in a workplace pension scheme, then the tax relief applicable to you depends on the type of scheme. In most cases, you may not have to do anything and it will all be set up by your employer.

Additional Voluntary Contribution Schemes and Money Purchase Pension Schemes give you instant tax relief as the contributions to the pension fund are paid before the income is taxed.

If you have enrolled in a Salary Sacrifice Scheme, then you will not be eligible for tax relief. But, it allows you to save on income tax and your NI (National Insurance) contributions since you opt for a reduced salary in exchange for contributions to your pension scheme.

Stakeholder and Group Personal Pension Schemes work in the same manner as Personal Pensions do.

Tax Relief for Non-Tax Payers

If you do not earn sufficient income to pay income tax, you can still receive tax relief on any contributions you make towards a pension fund with an upper limit of £2,880.

The taxman will top this up with a 20% contribution making the total amount £3,600. Every penny you add to the pension fund above this amount will be taxable.

 

Taking Care of Your Dependants During Retirement

If you are single, then planning for your twilight years becomes a relatively easy task.

You just have to ensure that you follow the recommendations made by your pension provider and create a right mix of investments which should provide you with a fixed monthly income for the rest of your life.

But if you have a spouse, an ageing parent or children to provide for, then your retirement plans must make provisions to ensure that the income you receive must be enough for them as well.

Also, you must consider the fact that they might live on after your death, requiring a stable income for the rest of their lives. Factors like your current health, healthcare costs and increased life expectancy should be a deciding factor when you plan your retirement income if you have dependants.

There are multiple ways to do this and you must ensure that you consider the pros and cons of each option before you select it.

Nominate before retiring

If you have a defined benefit pension scheme at your workplace, such as a final salary or average career scheme, then it allows you to choose one or more nominees to receive your pension pot, if you were to pass away before retiring.

Ensure that you fill this form beforehand. You may also need to update the information in this form or change the names if your financial or familial circumstances change.

Plan your finances 

Depending on the type of pension plans you have invested in and the amount of pension you have accumulated, you can get a good idea of the amount you can receive each month.

You can use online tools like Pension Calculators or use the services of a financial expert to get a better idea.

In addition to this, your spouse or civil partner may have a pension pot of their own.

Plan how you can use the pension pot to provide an income that allows the two of you to live comfortably. Once again, either partner can nominate the other to inherit the pension, in the event of death.

After the introduction of new reforms in April 2015, you now have multiple choices to access your pension pot.

Read our article – Options for using your pension pot

Invest in an annuity

You can choose to take 25% of your pension pot as a tax-free cash amount. The rest can be used to purchase an Annuity.

An annuity will provide you with a fixed monthly income for you and your spouse for the rest of your lives.

There are different types of annuities and ensure that you choose one that can provide for your dependant after your death.

  1. Joint Life Annuity: If you choose a Joint life annuity, any financial dependant or nominee you choose will continue to receive an income in the event of your death.  (In most cases, for the rest of their lives). It can also be used to pay your dependent children until they reach the age of 23. The income your beneficiary will receive after your death will depend on the income paid out to you while you are alive. The lesser you choose to be paid while you are alive, the more your dependent beneficiary will receive and vice-versa.
  2. Guarantee Period Annuity: A guarantee period annuity will pay you a fixed income for a guaranteed period of time. This may be 5 or 10 or 15 years depending on the scheme you choose. So, if the annuitant (a person whose pension was used to buy the annuity) dies five years into the period, the dependent person will receive the guaranteed income for the remainder of the term. However, if your partner or spouse outlives this term, they will not receive the income. There is also an option to buy a Joint annuity together with an annuity.
  3. Capital Protected Annuity: A capital protected or value protected annuity will pay your dependant a lump sum cash amount rather than a monthly income, after your death. The cash amount will be the remainder of the pension pot after deducting the income already paid out to you before your death.

 

Understanding Pension Wise

As per the new Pension Freedom reforms that were introduced in April 2015, savers now have more flexibility in the way they access the funds in their pension pot.

There are multiple options and choices when it comes to maximizing tax benefits.

Are you aware of all the choices you have?

Do you know how the new pension reforms can benefit you?

If you don’t, then now is the right time to head straight to Pension Wise.

What is Pension Wise? 

On the 21st of July 2014, the Chancellor of the Exchequer, George Osborne announced that millions of UK citizens would now have the right to impartial guidance on how to utilize their pension pots after the new Pension freedom laws come into effect.

Following this announcement, the Pension Wise service was launched in Feb 2015.

Pension Wise is a completely free service backed by the government and manned by independent financial experts who will guide retirees on making the right decisions regarding their pension funds.

There are multiple ways in which Pension Wise can assist you.

  • The Pension Wise Website is a comprehensive source of information regarding retirement finances. You can get detailed information about pensions, your choices and the tax implications of making those choices.
  • You can schedule a face-to-face appointment to further discuss these choices ensuring that you are well informed and aware of the decisions you make.
  • You can call them on 0300 123 1047 or use their web chat function to speak to a Financial Expert who will provide consultation on your doubts regarding pensions.

Benefits of using Pension Wise

If you are not fully aware of how the new Pension Freedom reforms would affect you, then it is better to seek impartial advice.

And there is no better place to get impartial advice than a government-backed agency.

It is free and it can help you in more ways than just provide information.

Disputes: Pension Wise can act as a mediator if you are involved in a dispute with a pension provider (Public or private) and have already tried to resolve the matter by writing to them. All you have to do is furbish copies of the initial correspondence you had with the scheme. The in-house pension specialists will then guide you through the best possible course of action.

Telephonic Guidance: As long as you are above the age of 50 and have a defined contribution pension plan, you can call Pension Wise on 0300 330 1001 between 8 am to 10 pm every day to schedule an appointment or a telephonic guidance session. You can also walk into the nearest Local Citizens Advice Bureau to schedule an appointment.

Impartial Advice: Unlike pension scheme managers who may try to sneak in a sales pitch between advice, the pension experts at Pension Wise will give you unbiased advice without recommending any service or product.

Scams: Since many people are unaware of how the new pension freedom norms would affect them, fraudsters are having a ball. There are many types of pension scams which target retirees. If you have received an offer for a free pension review or an overseas investment option in an ‘exotic’ location, then it may well be a scam. You can speak to the financial experts at Pension Wise before deciding on any further course of action. You may also check our article on how to Identify a Pension Scammer.

Prepare for your consultation

If you have booked a phone guidance session or have scheduled a face-to-face appointment with Pension Wise, then you must be prepared with some information for the appointment.

  1. Get the latest pension statement from your provider to know the value of your pension pot(s).
  2. Analyze your current financial situation and keep the details handy. You may need to discuss your current salary, your cost of living during retirement and whether you have additional savings or debts.
  3. Decide on how you wish to access the Pension Pot. Do you prefer a fixed monthly income or are you better off accessing small sums of money from the pot?
  4. Do you have any health conditions that may affect your life expectancy?

Remember, good advice is only a phone call away. Make use of it.

Factors That Determine Your Annuity Income

As annuity rates dip after the infamous credit crunch, pensioners were left with a bare minimum monthly income despite selling their entire hard-earned pension pot.

Then came the pension overhaul which has changed the way retirees can access their pension pot and use it.

Buying an annuity before the age of 75 is now merely an option that pensioners can choose to ignore. They can instead take the entire amount as a cash lump sum or draw small instalments of money when they wish to.

But as experts recommend, buying an annuity may still be a better choice, because it guarantees retirees with a fixed monthly income for the rest of their lifetime.

With rising life expectancy, a person’s retired life could last well beyond two decades, even three. Will the money last that long if you take it all in one go?

Would you rather blow your entire pension on a Lamborghini or have a fixed monthly income that remains unaffected by the economy or the stock market crash?

How much will you get?

The first question that most savers ask is, ‘How much money will I get every month if I buy an annuity’. The answer is relative.

There are multiple factors, individually dependent, that can influence your annuity income. Here are some of them.

  1. The Type of Annuity: Buying an annuity is a one-time decision that usually cannot be reversed. So, ensure that you know what you are choosing. The type of annuity you choose along with the options you select will impact your monthly retirement income. For example, if you have a dependent spouse or child, you may have to opt for a joint-life annuity which will reduce your monthly income but ensure that the income will be paid to your dependent nominee for the rest of their lifetime.
  2. Annuity Rates: The annuity rate when you buy the annuity is one of the most crucial factors that will influence your income. If the rates are high, you get a higher monthly income. If the rates are low, the income will be lower.
  3. Deposit Amount: More the money you put into an annuity, the higher you get each month. If you have accessed your pension pot and drawn the tax-free cash lump sum amount (25%), then you may be left with a smaller amount to exchange for your annuity.
  4. Payment Terms: How do you wish to be paid? An annuity provider can pay you monthly, quarterly or even yearly. The more you defer the payment, larger the amount you receive.
  5. Age: The younger you are when you buy an annuity, the lesser you will receive. For example, if you buy an annuity at 65, the insurance company will consider your current health and the life expectancy at that time to determine your monthly income. At the same time, if you choose to buy an annuity at 75, your life expectancy reduces. So, the annuity provider has to pay you a fixed monthly income for less number of years. Hence, you may qualify for a higher monthly income than what you would have received if you bought the annuity at the age of 65.
  6. Your Pension pots: The number of pension pots you have accumulated over the years will increase the amount of money you use to purchase an annuity. So, consolidating your pension pots can give you a higher monthly income.
  7. Inflation: Inflation can affect what you can purchase with your fixed monthly income in 10 years from now. So, unless your annuity income increases with time, it could not be enough for you to lead the lifestyle you do currently. A positive sign is that inflation rate in UK reached an all time record low of -0.10 percent in April 2015. But whether the trend will continue or increase; only time can tell.
  8. Tax: Annuity payments are subject to taxation at your usual rate. So, if you have other sources of income, then you must speak to an independent financial expert about your financial circumstances before you invest in annuities.

Identifying a Pension Scam

New pension reforms were introduced on 6th April 2015 which will change the face of retirement income in the UK forever.

It allows citizens better control and flexibility to access their pension pot. But a lot of questions still hang in the air as people are not fully aware of the changes.

Fraudsters see this as a perfect opportunity and time, to strip the hard earned money off gullible retirees.

Pension Scams of multiple varieties are on the rise in the UK.

From an email that pops out of the blue, promising incredibly high returns from ‘creative’ investment options, to a phone call that lures you into believing that you can get access to your pension pot before the age of 55, there are many ways in which a pension shark may approach you.

The only way you can protect your life savings is by being aware and spotting a scam a mile away.

The Modus Operandi

Most pension fraudsters will try to entice you into transferring the funds in your pension pot in exchange for lucrative returns on bogus investments.

You may receive an email, a phone call or a conman may turn up at your doorstep.

The person will look like a legitimate representative of a pension company and will sound extremely convincing.

They may even have a very attractive website that may have the words, ‘Pension’ or ‘Wise’ in their name, to fool people into believing that they are a part of the government Pension Wise service.

You are more likely to be contacted by scammers if you are nearing retirement.

The Common Ones

Over the years, many retirees have been scammed off their hard earned money by scammers who keep coming up with innovative methods.

These are some of the common ones that you may be approached with:

  1. Free Pension Review: This is one of the most commonly used methods by fraudsters. You may be contacted by companies that claim to work on behalf of the government offering you free guidance on investing your pension funds. Typically, retirees are asked to move their funds into self-invested personal pensions (SIPP) with unregulated investment options like forestry, wineries, storage pods, cement factories in Nigeria, properties in overseas destinations like Costa Rica and rainforest harvesting.
  2. Pension Liberation Plan: The only way you can get access to your pension funds before the age of 55 is if you are batting ill health. Fraudsters who offer ‘Pension Loans’ or ‘Pension Liberation Schemes’ hide the fact that you may lose up to 70% of the liberated pension amount as taxes by the HMRC. This will be in addition to up to 30% charges by the fraudsters themselves leaving you with virtually nothing.
  3. Common Names: These are some of the terms that should immediately draw a red flag. One-Off Investment Schemes, Legal Loopholes, Government Endorsements, Overseas Investments and Creative Investments. The general thumb rule is to avoid any investment option that you receive via cold-calls.

Protect Yourself

It is important to know that the government will never contact you or encourage you to make investments in get-rich-quick schemes.

So, if you receive a cold-call from someone who claims to represent or work on behalf of the government and asks for details about your pension pot, do not reveal the information. The best you can do is hang up. Alternatively, you can ask them if you can call them back.

Most fraud companies do not want you to call them back and will refuse.

If they agree and provide you with a phone number, call the Financial Conduct Authority (FCA) on 0800 111 6768 to verify if the person or company calling you is legitimate.

The FCA register has details of all licensed pension providers. Call back the company or person on the number provided in the FCA register and not the one they provided you with.

Do not be rushed into making a decision no matter how lucrative the investment option seems or how urgent they make it appear to be.

Always seek the advice of an independent professional before you agree to transfer your pension pot to any SIPP. 

Immediate Need Care Annuity

In 2011, almost 300,000 elderly people in the UK were living in a care home facility. If the numbers of people opting for residential care or those in a nursing home were also accounted for, then it would be a significant chunk of the population.

Yet, only a very small percentage of these people receive assistance from the state.

The cost of long-term care can be staggering. It is estimated that residential care can cost up to £30,888 depending on where you are based in the UK.

Nursing care, on the other hand, can cost up to £41,912 depending on the location.

The cost of long-term care may reduce or increase based on your current health condition.

In such circumstances, an immediate needs annuity might be a good choice.

Also known as a care fee annuity or immediate care plan, it is an annuity arrangement that will pay you a fixed guaranteed income for life to pay for healthcare expenses.

How it works

If there is a significant gap between your earnings and the cost of care, then that amount will be provided by an immediate needs annuity, in exchange for a lump sum cash amount.

It can also be purchased by a caregiver to an elderly relative.

The amount that you would need to pay to receive the guaranteed income would depend on multiple factors. Some of them are:

  • The income you need every month
  • Your age
  • Your health condition (lesser your life expectancy, cheaper the plan will be)
  • Annuity Rates

Once the annuity plan is purchased, the tax-free guaranteed income will be paid directly to the care provider. You can either choose a fixed income or opt for an index-linked income which will rise with rising expenses.

An escalation can also be attached to the annuity in which the income will rise by a set percentage (between 1 to 8%) each year.

Also, you can opt for capital protection, which would assure that, in the event of your untimely death, some amount of the pension pot (up to 75%) would be returned back to your family. However, if you opt for capital protection, it would increase the cost of purchasing the annuity.

Deferred annuity

A deferred annuity is a type of annuity plan in which you can purchase an annuity plan but defer the payments for a specified number of years, which is called the ‘Deferred period’. (1 to 5 years)

If your health is deteriorating or you expect healthcare costs in the years to come, then you may opt for a deferred annuity. However, you will have to pay the cost for the care during the deferred period.

The main advantage of a deferred annuity over an immediate needs plan is that the capital amount needed to purchase the annuity. The more the period is deferred,  the less the annuity will cost.

Eligibility 

Annuity providers have various means to determine if an application for immediate care annuity is eligible. The Anderton diagnosis index is considered as a reference guide.

The rate that you may receive will differ according to the medical condition suffered by you or your relative.

Is this the right choice for me? 

An immediate need annuity will be the right choice for you if one or more of the following apply to you.

  1. You or a relative is in a care home or is receiving residential care for a health condition
  2. There is a significant difference in your income and the care costs
  3. You wish to have a guaranteed monthly income that can be utilized for your care costs
  4. You wish to safeguard your remaining capital and cap the cost of your healthcare
  5. You have the capital amount needed to purchase the annuity

It may not be the right choice for you in the following scenarios:

  1. You do not have immediate healthcare costs.
  2. The health condition may only need temporary care
  3. You need the capital amount back in the future
  4. You may be eligible for Continuous Care Funding by the NHS

The Flipside 

An immediate care annuity is usually a one-time purchase that cannot be reversed. For example, if your health condition improves a few years after purchasing the annuity, you cannot cancel it and cash-in.

Also, if your healthcare provider anticipates a short life expectancy for you, then there are other annuity options like an enhanced annuity which may be a better choice.

Read more Types of Annuities to know your options and make a wise decision.

 

 

 

 

 

Income Drawdown vs Annuity

As the new pension flexibility reforms came into effect in April 2015, it has been estimated that the number of people opting for an annuity would reduce by up to 70% or more.

Since retirees now have a lot more options in accessing their pension pots, why risk being locked with an annuity that may not provide enough retirement income?

What most people do not realize is that more the options you have, greater the risk of making an incorrect decision that you may have to live with.

Irrespective of whether you reached pension age before April 2015 or after it, you must seek independent financial advice before you make any decision regarding your pension pot.

Is Flexi-access drawdown a better choice than buying an annuity with a large part of the pension pot?

Flexi-Access Drawdown

One of the most crucial changes made to Pension Laws, Flexi-Access Drawdown allows you to take a quarter of your pension pot as a tax-free lump sum cash amount and reinvest the remainder into funds of your choice, which will then provide you with taxable income that you can use when you wish.

You can handpick the funds that you think will perform well and be able to produce an income you desire. However, the income may not be permanent and will be dependent on the performance of your investments.

You may choose to start taking the income right after you invest or you may defer it for some time.

Alternatively, you can also convert the remainder of the pension pot into income drawdown which allows you to take small sums of money from it. Each time, 25% of the money can be taken as a tax-free cash amount.

The Risks

The risks of using the Flexi-access drawdown option are many, especially if you are making the decisions yourself.

Here are some of them.

  1. You may be tempted to take out too much money during the earlier years of your retirement
  2. You may start taking a higher income and your investments may not match this level causing your future payouts to reduce
  3. You may outlive your pension pot
  4. There may be limited funds to choose from
  5. Charges may be applicable
  6. You may not be aware of the tax implications

Drawdown and Tax 

Any money that you will withdraw from your pension pot will be added to your yearly income and will be subject to income tax.

If you withdraw larger amounts, then the tax bracket will be higher.

What should I choose?

Your choice depends completely on your personal circumstances and objectives.

  • Are you a ‘risk-averse’ person? Then you are better off choosing the stability that a fixed retirement income can provide you with. Buy an annuity with a part of your pension pot. Once again, there are multiple choices and you should do your research and make a decision.
  • If you can live with capital risk, then you can think about Flexi-access drawdown and invest the remainder in funds. You can draw an income that will not be stable.
  • On the other hand, if your risk tolerance is somewhere in the middle, then you need to work out how much money you can afford to lose before it starts to affect your lifestyle habits. Set a limit and keep the rest aside or use it to secure a retirement income.

Most experts recommend that you at least have a fixed retirement income that can meet your basic expenses. This will ensure that at least your basic standard of living remains protected.

This fixed income can be a mix of a state pension, employment pension schemes and from an annuity that you can purchase with a part of the pension pot.

You can also choose to protect it against inflation so that the buying value of the fund remains the same even after 10 or 15 years.

Seeking Expert Guidance 

No matter how informed you are, it is better off to seek professional advice before making crucial decisions about your pension pot.

You can always consult Pension Wise, the free government-backed service for impartial advice.

Planning for Retirement – Part 2

As discussed in the first part of this article, the earlier you start planning for your retirement, the more financially secure you can be during your golden years.

But most people get too caught up in the demands and pleasures of today and almost forget that there is a tomorrow.

If you still haven’t begun, then there is no better time than now to start planning for your retirement.

We discussed the first three decades of your employed life and the options you have at hand to plan for a secure future.

Despite it having a notorious reputation as the ‘selfish years’, you can inculcate good habits in your twenties and thirties which can form the bedrock of your retirement plan in the years to come.

The forties is the time when retirement is only a stone’s throw away and planning becomes a critical necessity.

Then come the Fifties.

In your 50s

Your fifties are unarguably the most important decade when it comes to financial planning.

You can see retirement on the horizon. You may have a date or a year in mind already.

This year should be enough for you to lay out a roadmap and calculate the minimum amount of money you need, to lead the lifestyle that you dream of.

There are tools like online retirement calculators which can provide you with a ballpark figure.

While it may just be a vague picture as online calculators very rarely account for taxes correctly, it should give you an overview of the many components that make up your retirement planning.

Now, it’s time to have an in-depth look at your pension investments. While most financial experts will advise you to take out risky investments like equities and opt for secure ones like cash investments, the fact is that there is no free lunch. Every investment option has its own pros and cons.

Hence, it is ideal to build a portfolio that has a mix of investments. A percentage of your investments should focus on high returns and another half should be safe and tested methods.

Spend as less as possible. The goal should be to maximize your contribution to your pension fund. All other expenses (mandatory and luxury) should be cut down.

If you were one of the early starters and have managed to accumulate a sizeable fund already, then you can consider investing in a Self Invested Personal Pension (SIPP) as it gives you greater control over your investments.

You may also think about buying an Annuity which can make a significant difference to your income in the years to come.

Your goals in this decade should be:

  • Layout a roadmap for your retirement
  • Reassess your pension investments
  • Try and create a portfolio with a mix of investments
  • Spend less and contribute more towards your pension funds
  • Review your finances periodically

The Sixties

The sixties is the home stretch. You are almost at the finishing line.

You may plan to retire in the early or later years of the decade.

You may also be fit enough to work beyond the sixties adding to your pension pot.

With increased life expectancy, your retirement period could last up to three decades. And it is important that your retirement income should last as long as you do.

So, making the right decisions regarding your pension fund which will be the source of your income and cash in the years to come, is crucial.

So, it’s time for reassessment.

These are some of the questions you may want to ask yourself.

  • Are your debts cleared off?
  • Do you still have a mortgage?
  • Are there dependants on your payroll?
  • Have you considered where you wish to live or have major expenses (house repair or buying a car)?

You need to remember that you will be transitioning into a phase where you will have to create a fixed income every month. And it is crucial that you have your debts and expenses in order.

Speak to an Independent Financial Advisor before you make an important decision.

Read our article, ‘How to Select a Financial Advisor’ for more information.

Now, it is time to prepare for retirement as you enter your seventies and beyond. Your planning is the key, to living comfortably through your retirement years. So plan wisely.

You may also look at our Complete Pensions FAQ page for more information.