When the time comes to finally draw your pension it’s important to put some strategies in place to ensure you don’t outlive your savings. Get it wrong and you could be forced to return to work or drastically decrease your outgoings, but get it right and you could live a comfortable retirement for decades.
Calculating your retirement income
Before you can choose a spending strategy for retirement you’ll need to work out the total value of your pension and how much this could generate in retirement income. Think about how much each of your pensions is worth: if you haven’t already consolidated your old workplace pensions into one, you might have a few dotted around from previous employments.
These should be fairly straightforward to locate, however if you need some assistance the government’s Pension Tracing Service is a great place to start. When you’re calculating your total savings, don’t forget to include money you’ve got saved in ISAs and other assets.
Planning for the best case scenario
As well as digging into your pension statements to see how much you’ve got saved, you’ll also have to consider how long your money will need to last. At the moment the State Pension age is 65, but it’s slowly increasing. By 2020 you’ll have to be 66 before you can claim the State Pension and by 2028 you’ll need to be 67.
It’s possible to withdraw a workplace or private pension around a decade earlier from the age of 55, although this is going up too and is expected to increase to 57 by 2028. In the not too distant future it looks likely that both State and personal pension ages will be based on average life expectancies.
Last year analysis by the ONS showed that the average 65-year-old claiming their State Pension would live for around 22.8 more years, giving them an average life expectancy of about 87 years. So that’s around 23 years of retirement after the State Pension kicks in and possibly 33 years of retirement if you access your personal pension at 55. Needless to say this is a long time to be relying on your retirement fund to see you through, especially if you haven’t saved very much or intend to live a lavish lifestyle.
If you plan for the best-case scenario it’s less likely you’ll be caught short and experience a retirement shortfall. That means dividing your retirement income by anywhere between 23 and 33 years, or more, depending on when you’d like to retire. Our online pension calculator can help you do the maths and will give you a breakdown of how much you’ll be able to take from your pension each year. If the amount is too low and not realistically enough to live on, you’ll need to think of other ways to supplement your income, or increase the amount you save in the run up to retirement.
4 strategies for maintaining your retirement fund
When it comes to choosing the best way to withdraw your pension and ensure it lasts, there are a few pension options and strategies you can employ.
1. Drawing a fixed retirement income
There are two ways of drawing a fixed income from your pension. An annuity is a financial product you can buy upon retirement and that works similarly to an insurance contract. You sell your pension for an agreed rate, and then receive a set income for a fixed term. This can be several years in duration, or for the rest of your life.
An annuity is a good way of guaranteeing an income and also takes the hassle of managing your retirement income out of your hands. It also provides greater security than the main alternative as you’ll know up front how much you’re going to receive and will be able to plan and budget accordingly.
Annuity rates set for second successive year of rises https://t.co/NzZJgo4VVc— FTAdviser (@FTAdviser) 7 August 2018
If you’d like to receive a fixed retirement income but would like to explore an option that’s less permanent than an annuity (which cannot be undone), self-managing your withdrawals is an option, using drawdown. If you opt for this strategy you’ll have to be strict and ensure you don’t go over the limits you set for yourself. If you struggle, you may want to consider purchasing an annuity in future.
2. Generating a variable retirement income
Drawdown is a flexible retirement product that lets you access your retirement savings when you need them. Not only does flexi-access drawdown put you in control of how much you withdraw and when, it also provides an opportunity for your pension to continue growing.
Did you know PensionBee offers a drawdown product? As with all investments, your capital is at risk. pic.twitter.com/UrMcOXKPOH— PensionBee (@pensionbee) 1 August 2018
With drawdown your pension remains invested so the amount of retirement income you have has the potential to increase over time, however there’s a risk that it could also decrease depending on how your investments perform. One of the main advantages of drawdown is that you can change your mind and do something else with your pension, such as buying an annuity, at any time.
3. Avoiding excess tax charges
Effectively managing tax is one of the most important strategies you can employ to ensure your pension lasts well into retirement. If you withdraw too much retirement income in one tax year, the rate of income tax you pay will be higher, leaving you with less money.
When you first access your private pension you can opt to withdraw 25% as a tax-free lump sum with no questions asked. From there you’ll be charged income tax on every future withdrawal you make. If your pension is your only income, you can withdraw up to £11,850 tax-free in 2018/19, as everyone receives this personal tax-free allowance.
It’s important to be mindful of the income tax brackets, and time your withdrawals so that you don’t take so much that you fall into a higher tax bracket than you planned. In 2018/19 the tax brackets are 20% for total withdrawals between £11,851 and £46,350, 40% for total withdrawals between £46,351 and £150,000, and 45% for anything over £150,000.
4. Delaying taking an income
One of the best ways to ensure your pension lasts you well into retirement is to put off spending it until you absolutely have to. This spending strategy won’t suit everyone, but if you have the means to live in the early part of your retirement without drawing your pension it’s a good idea to delay accessing your savings for as long as possible.
Where a private pension is concerned your savings will have longer to grow if you leave them alone. If you keep working and paying into your pension you’ll continue benefiting from tax relief and employer contributions also, provided you still meet the criteria for Auto-Enrolment.
For the State Pension, the amount you’ll receive, when you finally start drawing it, will be based on your National Insurance record and how many years of qualifying contributions you have. Depending on your circumstances, you could receive more State Pension the longer you keep paying in and may also receive more if you simply defer taking it.
It’s never too early to start thinking about which spending strategy to implement in retirement and, the sooner you consider your options, the more prepared you’ll be.
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.