18 January 2022
Your pension savings are likely to play a significant role in ensuring you can maintain the lifestyle you want when you retire. So, it can make sense to seek advice at this time to ensure your fund remains “enough” for the retirement you seek.
Despite the importance of guidance at retirement, the Daily Express reports that more than half of those accessing their pension pots for the first time in 2020/21 did so without taking guidance or advice.
Accessing your pension without professional help can increase the risk of you depleting your pot and running of money. You might also pay more tax than you need to.
So, with more and more people going it alone, here are two powerful ways we can help you to get more from your savings.
1. Take sustainable withdrawals
If you have a defined contribution (DC) pension, you’ll be responsible for your decisions regarding how you decide to take your income. You might decide to buy an annuity to guarantee an income or, more likely, use flexi-access drawdown to manage your withdrawals.
If you do use drawdown, you need to carefully plan how much income you can afford to take, otherwise there’s a risk you’ll run out of money.
This could happen if:
- Your investments don’t perform as you expect, but you continue to draw the same amount
- You underestimate how long you will live
- You draw too much, too soon.
It’s this final point that many experts are worried about. According to Financial Conduct Authority data published in Professional Adviser, more than 160,000 people took annual withdrawals of more than 8% from their drawdown pot between April 2020 and March 2021. Almost half (43%) of people are taking this level of withdrawals from their fund.
So, why is this a concern?
Most financial experts suggest that, if you don’t want to run out of money in retirement, that a withdrawal rate of around 3% to 4% is sustainable. This should ensure you don’t deplete your fund too early.
It’s worth considering that there may be perfectly valid reasons why some people are withdrawing at a rate of 8% or more.
For example, if you have a generous final salary pension due to start in a few years, you might be happy to deplete your DC pension pot now, safe in the knowledge that your defined benefit (DB) pension will pay the income you need later on.
However, taking unsustainable withdrawals – such as the 8% mentioned above – presents a huge risk to your retirement. We’ll work with you to ensure that you draw income in a way that you can meet your goals, but without running out of money in later life.
2. Pay less tax
The generous tax relief on pension contributions can come into its own when you retire. You may well have benefited from higher- or additional-rate tax relief on the payments you made during your working life, and then you may only pay basic-rate Income Tax on your pension.
When you move into drawdown, you will have the option of taking 25% of your fund as tax-free cash. The remaining 75% is then subject to Income Tax, with the amount of tax you pay dependent on your total income for the year and your tax rate.
If you decide to access your pension fund without taking professional advice, it’s easy to end up paying much more tax than you need to.
For example, if you decide to draw a significant sum from your pot, this income will be added to the rest of your taxable income for that year. So, taking a large withdrawal could push you into a higher tax bracket and you could end up paying 40% or 45% tax on the sum you draw.
So, drawing a lower amount and topping up your income from a tax-efficient source (such as ISA savings) could generate the same level of income without the same tax liability.
In addition, taking a flexible income from your pension fund also reduces the amount you can save tax-efficiently into your pension. So, if you’re planning to continue working and making pension contributions, it could pay to consider alternatives to drawing from your pension fund.
Finally, you can typically pass a pension to beneficiaries free of Inheritance Tax (IHT). So, if you can generate an income by drawing on other savings (which will typically be liable for IHT) then you could reduce your overall tax bill.
Going it alone when it comes to your retirement could see you end up paying much more tax than necessary. We can work with you to establish the most tax-efficient ways of generating the retirement income you need.
Get in touch
If you’re approaching retirement and you’d like to consider your options, please get in touch. We’re the UK’s 2021 Retirement Adviser of the Year, so we’re ideally placed to give you the bespoke, quality advice that you need. Email firstname.lastname@example.org or call 0161 8080200.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results. The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.