Questions on new Pension Freedoms
Recent changes mean that you can choose how to take your money from your pension. For example, you could take unlimited lump sums as and when you like, or even take the whole amount if you wish. As previously, you can take up to 25% of your pension pot tax-free, and a taxable income from the rest, which is added to other income for tax purposes. So how do you decide? Here are some of the key questions you may have.
How long will my money last?
We are all living longer, on average a 65 year old in good health is expected to live for 24 years after retirement and it is thought that 25% of us will live to see our 95th birthday. Retirement savings will have to last for a long time, possibly 30 years or more. Leaving your money invested for longer could make a big difference to your lifestyle along your retirement journey.
How much State Pension will I get?
The amount of state pension is not the same for everyone and it depends on your employment history and when you were born. Remember the State Pension is designed to cover only a very basic standard of living without any luxuries.
What about savings I have?
If you have bank saving accounts, premium bonds or ISAs, it may be better for you to take money from these first before drawing from your pension plan. If you own your home you might think about downsizing or renting it out to fund your retirement.
What are my future financial needs?
Consider all of your living expenses, like household bills and family costs, and how these may change over the coming years. Remember to budget for holidays, transport and house repairs. Also factor in the fact that your financial needs are likely to reduce as you get older and become less active, but keep in mind that in your later years costs of long term care may be required.
How can I minimise my tax bill?
Consider your personal tax allowances and plan to take your retirement savings in a way which makes the most use of your personal tax allowance so you don’t have to pay tax unnecessarily.
Should I buy an annuity?
An annuity is a promise by an insurance company to pay you an income for the rest of your life. You should check the terms of the annuity before you commit as they cannot usually be changed afterwards. It is worth shopping around different insurance companies before you buy as prices can vary.
Will I lose any my welfare benefits?
If you are receiving state benefits or Tax Credits then taking your retirement savings could impact on the level of those benefits. This is a complicated area and expected to change in the near future. Make sure you understand how your state benefits, tax credits or long term care needs would be affected before deciding to access your retirement benefits.
What happens when I die?
If you die before age 75, any money left in your pension plan will be paid to your survivors free of any tax. If you die after 75, money paid to your survivors may be subject to tax depending on their circumstances. Retirement savings which remain in pension plans are not normally counted for inheritance tax purposes. If you have purchased an annuity, benefits payable after your death will depend on the insurance contract.
The value of pensions and the income they produce can fall as well as rise. You may get back less than you invested.
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Need more help?
This feature aims to give some informal hints and tips. McPhersons Financial Solutions are offering businesses free advice so get in touch now to arrange your meeting. Simply email Peter Watters firstname.lastname@example.org or call our Head Office on 01424 730000 for a free consultation at McPhersons’ London, Bexhill or Hastings offices. www.mcphersonsfs.co.uk