Pension Options Page

Planning and preparing for retirement

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Why reaching our 50s and 60s often brings retirement into sharper focus

As we navigate life, reaching our 50s and 60s often brings retirement into sharper focus. This phase heralds a well-earned respite from years of dedication and hard work. For many, retirement is envisioned as the most extended holiday of their lives, offering opportunities to travel, engage more deeply with hobbies or spend cherished moments with family and friends. However, realising this idyllic vision requires thoughtful financial planning.

Ensuring your financial affairs are in order as you approach retirement is crucial. With longer life expectancies and an ever-evolving economic landscape, having a sound financial plan ensures you can maintain your desired lifestyle without financial stress. This planning involves understanding your income sources, managing your savings and anticipating future expenses.

Determine your retirement timeline

Deciding when to retire is a pivotal step in your financial planning journey. Unlike a one-size-fits-all approach, the choice of retirement age is profoundly personal and depends on various factors, including your financial readiness, health and lifestyle aspirations. Understanding these elements can help you make an informed decision that aligns with your long-term goals.

Role of financial readiness

One of the most significant determinants of retirement age is financial readiness. Many individuals cannot retire until they can draw from their pension schemes or are eligible for the State Pension. Assessing your finances, including savings, investments and expected pension income, is crucial in determining when you can comfortably retire without compromising your standard of living.

Understanding pension options

Different pension types come with varying retirement age rules. Workplace pensions, mainly defined contribution schemes, and older defined benefit plans often set a retirement age, typically around 65. However, these can differ based on the specific terms of your pension plan. Knowing the details of your pension arrangements allows you to plan effectively for retirement.

Accessing personal pensions early

For those with personal pensions, there’s often more flexibility. Currently, personal pensions can be accessed from age 55, although this threshold is set to increase to 57 by 2028. This earlier access can provide opportunities for phased retirement, allowing you to transition gradually from full-time work to retirement while supplementing your income with pension withdrawals.

Considerations for early retirement

Choosing to retire early can have significant financial implications. Early access to pensions means smaller annual payouts, as your pension pot needs to sustain you for a longer retirement. Additionally, retiring before reaching State Pension age means you will need to bridge the income gap until those benefits become available.

Balancing lifestyle and financial security

Deciding when to retire should balance your desired lifestyle with financial security. Some may continue working part-time to maintain an active lifestyle and financial health, while others prioritise leisure and personal pursuits. Evaluating your priorities and consulting with us will help clarify the best path forward.

Understanding your retirement income sources

Planning for retirement is crucial to ensuring a comfortable and secure future. One of the most important aspects of retirement planning is understanding your potential sources and values of retirement income. This involves gathering comprehensive details about your pensions, savings and investments. Once you have these details, obtaining estimates from each source will help you gauge the total income you might expect upon retirement.

Estimating income from savings and investments

Begin by compiling information on all your savings and investment accounts. This includes personal savings accounts, stocks, bonds and any other investment vehicles you own. Understanding this will help you strategise effectively for your future financial needs.

Planning your retirement income

Evaluate whether the combined income from your pensions and State Pension will suffice for your desired retirement lifestyle. Generally, you may need around two-thirds of your preretirement
salary after tax to maintain your lifestyle, though individual needs vary.

Boosting your pension contributions

Planning for retirement involves more than just setting aside a portion of your income; it requires strategic thinking about maximising your pension contributions. If there’s a likelihood of a shortfall in your future pension income, it’s prudent to consider increasing your pension savings now. Even minor adjustments to your contributions can have a notable impact on your pension pot, thanks to the power of compounding interest.

Understanding the impact of contributions
Many individuals adhere to the minimum contribution levels set by auto-enrolment schemes. While these minimums provide a good foundation, contributing more than the baseline can significantly enhance your financial security in retirement. The carryforward rules further support this strategy, allowing you to utilise unused allowance from the previous three years to maximise
your contributions where you have sufficient relevant UK earnings to support the contribution and obtain tax relief.

READY TO TAKE PROACTIVE STEPS IN YOUR RETIREMENT PLANNING?

Secure your financial future by taking proactive steps in your retirement planning today. If you need expert guidance or want to explore your pension options further, we are here to assist you.

Contact us to confidently navigate this crucial journey, ensuring that your retirement plans meet your long-term goals. Let us support you in making informed decisions for a secure and comfortable retirement.

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Financial advice when planning retirement

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People who are confident about their retirement are most likely to have specific retirement goals and know what steps they need to take to reach them. But sadly, we see many people do not feel confident that they will have enough savings to live comfortably after they retire.

Many people have a fear of outliving their money, but most don’t have a clear idea of how much money they need during retirement. It’s important to remember that retirement doesn’t happen at a certain age, it happens when you have enough money to live on.

Seeking professional financial advice can help create a clear direction and understanding which will give you peace of mind that you are on the right track.

If you’d like to discuss your retirement, and would like to speak to an expert Financial Adviser, please get in touch:

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Is it time to give your pensions a health check?

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Entering your 50s is not just another chapter in your life; it’s a profound and exciting phase in your financial journey. By this time, life may have settled into a more predictable rhythm. Perhaps your children are financially independent, and your career is at a peak, providing a stable income.

Pension review

In your 50s, a pension review is pivotal in preparing for a secure retirement. This review thoroughly evaluates your current pension plans to understand their performance and projected future income.

Conducting this review ensures that you know how on track you are to achieving a comfortable retirement, providing you with confidence and clarity as you approach this life stage.

Obtain a State Pension forecast: If you haven’t already done so you can obtain a State Pension forecast from the Gov.uk website.

Review pension statements: Gather and review your latest pension statements to understand your current savings and projected retirement income.

Evaluate progress: Check if you are on track to meet your retirement goals. Consider factors like your desired retirement age and lifestyle.

Consolidate your pension pots: If you have had more than one employer in your lifetime, you’ll probably have more than one pension pot, too. If appropriate, consider transferring your old pensions and combining them under one roof, giving you more control of your money and where you’re invested in the run-up to and in retirement.

Envision your future: Start imagining what retirement might look like for you. Consider travel, hobbies, part-time work or any other aspirations.

Have a retirement plan: A general idea of your retirement goals can help shape your financial planning and savings strategy.

Amplified retirement savings: If appropriate, you can boost your pension contributions to increase the overall amount saved, creating a larger pool of funds to support your retirement lifestyle. Even small increases can lead to substantial growth, ensuring you have more resources to draw upon in your golden years.

Power of compounding: One of the most important aspects of saving for retirement is the effects of compounding, which allows your money to grow exponentially. The earlier and
more you contribute, the more time your savings have to benefit from compounding. This means your contributions not only earn interest, but that interest also earns interest, leading to significant growth over the years.

Tax relief advantages: Pension contributions are highly tax-efficient. Depending on your tax bracket, you receive tax relief on the money you contribute, effectively reducing the net cost of your contributions. For example, if you’re a basic rate taxpayer, a £1,000 contribution might only cost you £800 after tax relief. This government top-up adds an extra layer of growth to your pension fund, enhancing its value.

Increase financial security: By ensuring you have sufficient savings for retirement, you reduce the risk of financial insecurity later in life. This financial cushion can help maintain your standard of living and provide peace of mind that you won’t outlive your savings.

Flexibility and options in retirement: A larger pension pot provides more choices when it comes to retirement planning. Whether you want to travel, pursue hobbies or ensure you can cover healthcare costs, having additional funds gives you the freedom to make these decisions without financial constraints.

Protection against inflation: Increasing contributions helps counteract the eroding effect of inflation on your savings. As the cost of living rises, having a robust pension fund means you’re better positioned to keep up with expenses, maintaining your purchasing power well into retirement.

Discuss retirement plans: Share your retirement goals and plans with your family to ensure everyone is on the same page.

Involve your partner: If applicable, coordinate financial planning efforts with your partner to optimise joint retirement outcomes.

Track investment performance: Regularly check how your pension investments perform against projections.

Adjust investment strategy: Be open to adjusting your investment strategy if your pension isn’t growing as expected.

Understand your Pension Annual Allowance: Check your Pension Annual Allowance, typically £60,000 or 100% of your UK relevant earnings, whichever is lower. If you have no relevant earnings, up to £3,600 could qualify for tax relief. Note any reductions if you have a high income or have triggered the Money Purchase Annual Allowance (MPAA).

Explore carry-forward options: Investigate the possibility of carrying forward unused allowances from the previous three tax years. !is can be complex, so ensure you meet the eligibility criteria.

Optimise Individual Savings Account (ISA) contributions: Consider contributing up to the £20,000 limit in the 2024/25 tax year. ISAs offer tax-efficient growth and withdrawals, making
them an effective savings tool.

Choose the suitable ISA: Examine your balance between cash and investments. Decide between Cash ISAs or Stocks & Shares ISAs based on your risk tolerance, capacity for loss and financial goals.

Capital Gains Tax exemption: Be aware of the annual Capital Gains Tax exemption, which allows you to realise gains up to a certain amount without paying tax (£3,000 in 2024/25). Plan
asset sales accordingly.

Dividend and Personal Savings Allowance: Utilise the Dividend and Personal Savings Allowance to minimise taxes on investment income and savings income.

Review annually: Make it a habit to review your tax strategy annually, ensuring it aligns with your goals  and takes full advantage of available allowances.

Discuss financial strategies: Share your tax planning strategies with your family to ensure they understand and can support your financial decisions.

If you would like to give your pensions a health check, get in touch today:

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Guide to Making the Most of Your Pension

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How to turn your pension savings into an income for life.

There are many things to consider as you approach retirement. It’s good to start by reviewing your finances to ensure your future income will allow you to enjoy the lifestyle you want.

The earlier you start thinking about what you’ll need for a comfortable retirement and where your money is going to come from, the more control you can have over that period of your life.

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How much do I need to save for retirement?

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Ensure your money works effectively to enjoy retirement on your own terms.

How you invest in your 50s could significantly impact your quality of life in retirement. While there still is time to increase your retirement savings, a seemingly simple mistake could derail your plans. This is where obtaining professional financial advice becomes crucial.

With retirement now in sight, as you approach this milestone, ensuring your money works effectively will allow you to enjoy retirement on your own terms.

Clarify your Goals

‘Saving enough for retirement’ has likely been on your list of financial goals for some time, but now is the moment to become more specific. Knowing exactly how much you need to save will give you a concrete target. This amount will depend on factors such as your intended retirement age, your retirement plans, projected investment growth and inflation.

A financial adviser can demonstrate how long your savings may last in retirement, helping you understand if you need to adjust your goals or savings habits.

Review your Investment Portfolio

When you are in your 50s and nearing retirement, ensuring that your investment portfolio maintains a suitable balance between risk and reward is important. The right level of investment risk depends on how you intend to fund your retirement and how far away your target retirement date is.

For those planning to buy an annuity in a few years, moving your pension fund from stocks to lower-risk assets such as cash may be wise. This strategy helps protect your pension pot from potential stock market crashes just before you need it.

Maintain Growth Potential with Diversified Assets

If you plan to fund your retirement through income drawdown or other savings and investments, moving into cash too early could mean your money does not last as long as required. Retaining some exposure to stocks allows your portfolio the opportunity for long- term growth. Considering that your retirement could span several decades, inflation will inevitably erode the real value of your savings and reduce your purchasing power.

One way to mitigate the impact of rising prices is to remain invested in the stock market. Historical data shows that the stock market generally outperforms cash over long periods and exceeds the inflation rate. Diversifying your investments across various asset classes can help your portfolio withstand stock market fluctuations.

Focus on your Pension

Pensions are an exceptionally efficient method of saving for retirement, particularly when you’re in your 50s.This is largely due to the tax relief you receive on personal pension contributions. For instance, a £1,000 pension contribution costs just £800 if you’re a basic rate taxpayer, £600 if you’re a higher rate taxpayer or £550 if you’re an additional rate taxpayer. Tax relief is essentially free money from the Government, significantly enhancing your retirement savings.

Most individuals can contribute up to 100% of their UK relevant earnings or £60,000, or £3,600 if there are no relevant earnings (whichever is lower) into pensions yearly while still benefiting from tax relief until age 75. However, it is important to remember that your pension annual allowance could be lower if you have a very high income or have triggered the MPAA.

Maximising Unused Allowances

If you wish to save more than your annual allowance, it might be possible to maximise unused allowances from the previous three tax years under carry-forward rules. This strategy can considerably enhance your retirement savings by utilising every available tax benefit.

Make the most of your Tax Allowances

There are numerous other tax allowances investors can utilise. For instance, you can invest up to £20,000 (tax year 2024/25) into Individual Savings Accounts (ISAS) to benefit from tax- efficient income and growth.

You can withdraw money from ISAs whenever you desire without incurring any tax; this makes ISAs a useful source of income for those retiring before age 55 (the current earliest age at which you can access your pension subject to health and certain occupations). Additionally, ISAs form an integral part of a tax-efficient retirement income portfolio.

Other Allowances to Consider

Other allowances include the personal savings allowance, dividend allowance and Capital Gains Tax exemption. You can earn up to £1,000 a year in interest without paying tax if you’re a basic rate taxpayer. If you are a higher rate taxpayer, you can earn £500 a year without paying taxes. Additional rate taxpayers don’t receive any allowance at all.

The annual Capital Gains Tax-exempt amount from 6 April 2024 is £3,000. If the total of all gains and losses in the tax year fall within this exempt amount, no tax will be payable. Gains above the annual exemption will be taxable. The exempt amount cannot be carried back or forward. The unused amount is lost if it’s not used, in part or full.

Time to optimise your pension and make the most of available tax allowances?

Please contact us for more detailed advice on optimising your pension and making the most of available tax allowances. We are ready to help you navigate the complexities of retirement planning and ensure you achieve a financially secure and comfortable retirement.

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How much tax will you pay on your pension pots?

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Since 2015, individuals over the age of 55 with defined contribution (DC) pension pots have enjoyed full freedom to decide how to manage their pensions; purchasing an annuity (a guaranteed income for life) is no longer mandatory. More than 221 people fully withdrew a pension pot of £250,000 or more between October 2022 and March 2023[1], resulting in a tax bill of at least £97,500 each[2], according to new analysis of FCA figures.

Following the reduction of the 45p rate of tax from £150,000 to £125,140 from April 2023, a pot of £250,000 withdrawn in the current tax year (2024/25) would lead to a tax bill of at least £ 8,700 each – over £1,000 more. In the same period, October 2022 to March 2023, 1,537 people fully encashed a pot of between £100,000 and £24 ,000, leading to a minimum £27,400 tax bill for each person.

Someone fully withdrawing a pot of £174,500, the middle point of that range, would have paid at least £63,500 in 2022/23 and a minimum of £64,700 now. These figures only consider the pension – people with other sources of income at the time of withdrawal would pay even more tax.

Paying significant amounts of tax to access pensions

This is because when people fully encash their pension, HMRC taxes anything above their 25% tax-free pension cash as income, subject to the LSA position of the individual, so it’s taxed like an ongoing salary. The analysis shows there are hundreds of people out there paying significant amounts of tax to access their pensions.

It’s impossible to know whether their circumstances warranted them being subject to a big tax hit, but for most people, it’s something you’ll want to avoid.

It’s important to remember that most pension income is subject to tax, like other income. Fully encashing a large pot will almost always mean a very large tax bill, sometimes taking away many years’ worth of savings. Often, when people fully withdraw their pension, it is simply to move the money to their bank account. Not only does this mean their savings become eligible for tax, but they’re also potentially giving up investment returns.

Withdrawing retirement savings more tax-efficiently

The good news is that there are ways to make withdrawing your retirement savings more tax- efficient, and it’s possible to spread your withdrawals over many years, which can be more efficient. Taking just one option at retirement, such as cash or an annuity, could mean you miss out on an opportunity to maximise tax efficiency and consider your financial needs in the round.

It’s worth considering a ‘mix and match’ approach to your retirement income, which could help you achieve the best of all worlds – you could, for example, annuitise a portion of your pension fund to cover essential outgoings and leave the rest in drawdown to access as and when you need it. Annuitising is the process of converting a lump sum of money into a stream of regular payments that are made over a specified period of time. Be sure to speak to your pension provider about your options, and we’d strongly recommend seeking advice or guidance when taking your pension.

How much tax will I pay on my pension pots?

First, most individuals will receive 25% of their pension pot tax-free, while the remaining 75% is taxable. The amount of tax payable on that 75% depends on factors such as your tax code, the amount you withdraw at a time and whether you have any other income sources.

It is important to remember that the total amount you can typically take tax-free across all your pension pots is now £268,275 unless you have specific protections in place. Most people cannot access their pension pots until they reach age 55 (rising to 57 on 6 April 2028).

Understanding your personal allowance

Everyone is entitled to a tax-free Personal Allowance each tax year, just like when working. For the 2024/25 tax year, the Personal Allowance is £12,570, which has been fro]en at this level for several years. Any amount above this will be taxed as earned income according to your tax band. The simplest way to avoid paying excessive tax is to ensure you do not withdraw more from a pension pot than necessary. Taking it in small, regular amounts could help keep your tax bill down.

Remember, you only pay Income Tax on anything over your Personal Allowance. Therefore, if a pension pot is your sole income source, you could withdraw
£12,570 from it each tax year without paying any tax. Conversely, taking large lump sums in the same tax year (outside of your 25% tax-free entitlement) could push you into a higher tax bracket.

Combining tax-free with taxable withdrawals

You do not necessarily need to take all of your tax-free lump sum at once. Often, you can take it in chunks over several months or years, provided your pension plan allows this. For instance, you could withdraw from the taxable portion of your pot and top it up with some of your tax-free amount.

Exploring ISAs as an income source

Unlike your pension pots, savings in your Individual Savings Accounts (ISAs) are generally not taxed upon withdrawal. You can contribute up to £20,000 in the 2024/25 tax year (across all your ISAs) and will not pay tax on withdrawals or gains. If you have savings in an ISA, consider using them to supplement your pension income to help reduce your tax burden. Alternatively, you could use your ISA to cover your entire retirement income before touching your pension.

For some, the early years of retirement can be more costly, necessitating a higher income. Hence, using tax-efficient withdrawals from your ISA to cover this period might be sensible. As you age and settle further into retirement, your expenses may decrease. Perhaps you have paid off your mortgage, enjoy less expensive hobbies or your children no longer rely on you financially. This could mean you can eventually afford to live off a more modest pension income, thus reducing your tax liability.

Ready to discuss how to manage your pension efficiently?

For further information and personalised advice on managing your pension withdrawals efficiently, please contact us so we can guide you in the most appropriate way for your unique situation.

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Source data:

  1. Retirement income market data 2021/22 FCA
  2. Calculated using Which’s tax calculator, Income Tax calculator and salary calculator for 2024/25, 2023/24 and 2022/23 – Which? Figures rounded to the nearest £100.

Britain’s biggest pension taxpayers

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There are ways to make withdrawing your retirement savings more tax-efficient, and it’s possible to spread your withdrawals over many years, which can be more efficient.

Taking just one option at retirement, such as cash or an annuity, could mean you miss out on an opportunity to maximise tax efficiency and consider your financial needs in the future.

We have produced a helpful guide on how to avoid becoming one of Britain’s biggest taxpayers, which you can download below:

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Our Pension Services

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We offer help and financial advice on all aspects of pension planning, from the basics of pension savings and tax-relief to the more complex areas of pension sharing on divorce and estate planning.

There are various benefits of pension planning including tax relief, potential cost savings and legacy planning.

One of the main benefits is making sure that you are on track to meet your retirement goals. Our Financial Advisors use sophisticated cash flow forecasting software to help you bring your financial future to life.

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Enhancing retirement through lump sum contributions

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Contributing additional amounts to your pension stands to benefit you significantly in the long term

Recent research findings have brought to light a striking observation: fewer than 10% of adults in the UK contribute occasional lump sums to their pensions. This statistic is particularly surprising given that such contributions could significantly amplify one’s retirement savings.

Analysis reveals that even modest lump sum investments can significantly increase the overall size of one’s pension pot due to the power of compound growth over time. For example, starting with an annual salary of £25,000 and contributing the auto-enrolment minimum (5% from the employee and 3% from the employer) from age 22 could lead to a retirement fund of around £434,000 by 66.

Yet, by adding nine lump sum payments of £500 every five years from age 25 to 65, you could enhance your retirement savings by an additional £11,000. Those capable of making heftier contributions, such as £5,000 every five years, could see their pension pot grow to £549,000, which is £115,000 more than without any lump sum additions, not accounting for inflation.

Value of forward-thinking financial decisions

Encountering unexpected financial windfalls, whether through bonuses, gifts or other means, often tempts immediate expenditure. Currently, many are directing these extra funds towards managing monthly expenses. However, those who are financially able to contribute additional amounts to their pension stand to benefit significantly in the long term.

Pensions offer tax efficiency and the potential to outpace both inflation and interest rates on savings accounts, making them a wise choice for securing one’s financial future. With the end of the fiscal year having passed, and with it the expectation of annual bonuses for many, allocating a portion of this windfall towards a pension could substantially impact your retirement lifestyle.

Role of employers and providers in future planning

Employers and pension providers play a crucial role in educating individuals about the importance of long-term financial planning. It is essential to illustrate how pensions fit within a broader financial context, ensuring individuals perceive retirement savings as a key component of their overall financial strategy.

These efforts can empower individuals with the knowledge and resources needed to make informed decisions about their financial future, fostering a proactive engagement and planning culture.

If you’d like to discuss your financial future, please get in touch with us:

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Source data:

[1] Boxclever conducted research for Standard Life among 6,350 UK adults. Fieldwork was conducted 26 July–9 August 2023. Data was weighted post-fieldwork to ensure the data remained nationally representative on key demographics.

[2] Calculations assume the following: Starting salary £25,000 – Employer contributions 3.00% – Employee contributions 5.00% – Investment growth 5.00% – Salary growth 3.50% – Annual investment costs 1.00%

 

Free Guide: Enhancing Pension Contributions

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Planning for your retirement is one of the most important financial decisions you will make and no matter what your age or how far away from retirement you are, putting savings plans in place as early as possible to maximise your pension pot is vital.

We have produced a free Guide to Enhancing Pension Contributions for a Brighter Future to help you decide how to maximise your pension savings :

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