Taking control of your retirement plans

Posted by Liz Rees in Latest insights category on 30 Jun 20

The state pension triple lock guarantees it will go up each year by either inflation, the increase in average earnings or 2.5%, whichever is highest. Anyone retiring after April 2016 currently gets £9,100 p.a. based on a minimum 35 years of national insurance credits.

There have been rumours the government might suspend, or even abandon, the triple lock. The rationale is that pensioners will be protected from the sharp fall in earnings this year, by the 2.5% floor, yet when furlough schemes end and earnings rebound they could potentially receive an unfair boost to their pension.    

Don’t rely on the state pension

The government is spending increasing amounts on the state pension due to an ageing population and because people are living longer in retirement. The current speculation around the triple lock is a reminder that it could be risky to rely solely on the state pension.

Because there are fewer workers paying contributions to support the growing numbers of retirees, the burden of the state pension is growing. As such the state pension age, currently 65, will rise to 67 for both men and women by 2028 and further increases are already pencilled in.

There is a significant gap between pension requirements and the state pension, which is less than 30% of average net pre-retirement earnings. To address this, the government has introduced auto-enrolment, making it compulsory to save into workplace pensions. The minimum contribution is currently 8% of qualifying earnings but this may not be enough.

Retirement planning is important

Today there is a greater need for each of us to take responsibility for our own income in retirement. The vast majority of companies no longer offer final salary pensions, preferring to make contributions but leave the responsibility and consequences for the investment performance to the individuals.

Although more people are saving into a pension than ever, it is their responsibility to understand how much their pension is worth. This depends on how much they put in and how the investments perform. Make sure you know what you can expect in retirement, so you have time to do something about it before it is too late. Willis Owen have a retirement planning guide that you may find useful.

Pension freedoms, introduced by Chancellor George Osborne in 2015, have transformed the options at retirement and are currently available from the age of 55. No longer is an annuity, which pays a fixed income for life, the default option for most of us.  

Under flexi-access drawdown you can take up to 25% of your pension tax-free and leave the rest invested. You then choose whether to take regular monthly or annual income, a series of lump-sums or withdraw it all in one go. These payments are subject to income tax.

Another alternative is to take ad-hoc withdrawals from your pension, known as 'uncrystallised funds pension lump sums (UFPLS)'. If you access your pension this way, the first 25% any withdrawal will be tax-free, with the other 75% taxable.

Keeping track of your pensions

Disturbingly, many people have no idea how much income they can expect to have when they stop working. Research by NOW: Pensions revealed that around a fifth of pension savers never check their pension.

Many of us may end up with several Defined Contribution pensions over the course of our working life. These can be consolidated into one pension to make it easier for you to manage, and it can be helpful to have them all in one place.

By transferring to a Willis Owen SIPP you can consolidate as many pensions as you wish into one account with a wide range of investment options to choose from. It’s easy to check and review your investments regularly so you won’t be out of touch. However, if you are unsure about the suitability of a transfer you may wish to take professional advice first.

Make the most of your workplace pension

If you have a workplace pension you should always make the most of employer contributions.  As long as you are aged between 22 and state pension age, and earn more than £10,000, you will be signed up automatically. Employers must pay into the scheme, currently a minimum of 3% of qualifying earnings, whilst employees contribute at least 4% to which the government adds tax relief. 

Tax benefits of pensions

It’s never too late to take advantage of the current tax breaks for saving into a pension although the earlier you start the longer it has to grow to meet your goals. You don’t even have to be earning; non tax-payers can contribute up to £2,880 p.a. and still receive a top-up from the government. This can be useful for those with caring responsibilities or in full-time education.

If you would like to learn more about how pension tax relief works, Willis Owen has produced a handy guide, which you can access here.

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