Pension Page

Pension Drawdown

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You can usually choose to take up to 25% of your pension pot as a tax-free lump sum when you move some or all your pension pot into drawdown, from the age of 55.

You will need to carefully consider where to invest the remaining 75% (or less if you have not needed to take the full 25%), taking your likely income needs and attitude to risk into careful consideration.

How does pension drawdown work

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This video highlights the options that you could have at retirement, specifically Pension Drawdown, what it means and the things that you need to consider when planning for your retirement.

The Golden Years?

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Be better off in retirement

Imagine you’re retiring today. Have you thought about how you’re going to financially support yourself, and potentially your family too, with your current pension savings? The run-up to your retirement may feel overwhelming, but this is an important time for you and your savings.

Following the pensions reforms, there are now more options available than ever and this has removed the compulsion to purchase an annuity. It also means that you can use your pension fund to benefit your named beneficiaries, whoever they may be.

Basic retirement lifestyle

If you are approaching retirement it’s time to think about what you’re going to do with the money you’ve been working hard to save all these years. The average UK pension pot after a lifetime of saving stands at £61,897[1]. With current annuity rates, this would buy you an income of only around £3,000 extra per year from age 67, which, added to the maximum State Pension, makes just over £12,000 a year – just enough for a basic retirement lifestyle.

In more recent years, when it’s time to take a retirement income, some people are choosing to do so through pension drawdown. Pension drawdown provides a way to establish a flexible income, set at whatever level you choose, which can be increased or decreased over time to match your needs.

Flexibility and control

For many, this may seem a more fitting solution to their retirement needs than purchasing an annuity, which is a more established option that typically offers a set monthly income for life. However, although pension drawdown offers flexibility and control, there are differences to consider.

While annuity income is fixed for life, pension drawdown can only continue for as long as you have savings remaining – and once they’re gone, you’ll receive nothing. So, it’s important to receive professional financial advice to ensure that you withdraw your money at a rate that will last your expected lifetime.

Will your savings last a lifetime?

It’s important to consider that your retirement could last for 30 years or more, depending on when you retire and how long you live. This is why some people use pension drawdown as the option to provide their retirement income. Your savings remain invested even after you retire, which means they have the opportunity to continue growing through investment returns.

But it’s impossible to predict exactly how much they will grow each year. Some years they will grow more than others, and some years they may fall in value. If your rate of withdrawal exactly matched your growth rate, your savings could last indefinitely. But, because growth is so hard to predict, this is near impossible to do.

How much can you safely withdraw?

A 4% withdrawal rate is typically stated as a guide for how much you can withdraw each year from your retirement savings. This figure is estimated based on the history of the financial markets and how much investments have tended to grow over periods of around 35 years (the expected duration of retirement for someone who retires in their sixties).

So, if you have £500,000 in savings when you retire, 4% would initially equate to £20,000 a year.

However, there are a few additional details that mean this figure can’t be used totally reliably:

  • Past performance of the stock markets cannot reliably predict future growth
  • The performance of investments in your portfolio may be better or worse than average
  • It’s impossible to know for sure how long your retirement will last
  • Your financial needs are likely to change over time, typically peaking in early retirement and then in later life

Changing pensions landscape

So, a 4% rate of withdrawal could be either overly cautious, resulting in the accumulation of wealth that could create an Inheritance Tax
liability, or overly reckless, resulting in complete depletion of your savings when you still have years left to live.

In this world of ours, very little stands still. The same can be said for the pensions landscape. As high earners are faced with even more restrictions and potential pitfalls, it is vital to understand the rules and seek specialist advice. Start talking to us today about your future retirement plans and we can help you make sure it’s a resilient one.

Building a better retirement

If you’re approaching or have already turned 55, you might be wondering what is a good pension pot value to aim for. This will naturally
depend on your circumstances. To discuss your requirements, please contact us.

Mind the pension gender gap

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The pension gender age gap Women are being urged to think about their long term savings

Women are still behind men when it comes to retirement savings, which is why they need to consider the pension gender gap.

Imagine reaching retirement age and discovering that, despite years of saving, you don’t have enough money to get by. Worse still, suppose you’re unable to pay for the right kind of care in your old age.

If you and your partner separate or your spouse dies unexpectedly – will you have sufficient funds to see you through retirement? Now, all of these might sound like worst-case scenarios but, unfortunately, for women right across the UK one or more of them could become a reality.

Earning trends

The ‘Women and Retirement’ report[1] has found that if current work and earning trends continue, young women today will need to save an average of £185,000 more during their working life to enjoy the same retirement income as men.

The colossal gender pension gap is made up of a savings shortfall, plus the need to fund a longer retirement because women on average live longer than men. This also leads to higher care costs. Many women will naturally take time o! to start a family – resulting in gaps in their work history.

And even if women remain in the workforce, some still tend to earn less than men, on average.

Vulnerable situation

21% of women surveyed said they plan to rely at least partly on their partner’s income in retirement. However, this can leave women in a particularly vulnerable situation should they separate from their partner.

Right now, it’s rare for divorce settlements to account for pension assets, which means that women could end up in particularly unstable financial situations following divorce.

Funding retirement

Also, women tend to live longer than men – two to three years, on average. Indeed, this continued rise in longevity means that a 25-year- old man today can expect to live to 86, while a woman can live to 89.

And while rising longevity is of course a good thing, it does raise specific challenges – especially when it comes to funding retirement and old age.

Living longer

Together with living longer, women are also more likely to need care when they’re older. In fact, of the 6 million people in the UK over the age of 60 currently living with a disability, 3.5 million of them are women.

And those women who do need care spend on average a year longer in care homes than men. Right now, the average cost of care is £679 per week, which means women would need an extra £35,000 during retirement for residential care costs.

Moreover, as women can expect to live two to three years longer than men, they would also need around £50,000 for their retirement – bringing the total amount needed to match a man’s retirement income to £185,000.

Concerned about the gender pension gap?

As a woman, your pension is a key part of your retirement planning. How much you put away now, how you invest for the future and how you choose to access your pension once you’ve stopped working, are all key considerations for anyone hoping to enjoy a long and happy retirement. If you have any concerns or questions about your retirement plans, please contact us for more information.

Source data:

[1] Scottish Widows 2021 ‘Women and Retirement’ report – research carried out online by YouGov Plc across a total of 5,059 adults aged 18+. Data weighted to be representative of the GB population. Fieldwork was carried out between 23 March and 3 April 2021 through an online survey. 5,059 interviews were carried out. The sampling criteria were based on four key metrics: age, gender, region and social grade.

A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless plan has a protected pension age). The value of your investments (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future. You should seek advice to understand your options at retirement.

Scared-of-running-out-of-money-in-retirement

Scared of running out of money in retirement?

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Scared-of-running-out-of-money-in-retirementAre you scared of running out of money in retirement?

It has been well recognised that many are simply not saving enough into their pension pots for retirement. To avoid unwanted stress if you are planning to retire, you need to be absolutely sure your money is going to go the distance. Concerns you may have are:

  • Do I have enough to retire?
  • Will I run out of money, and when?
  • How can I guarantee the kind of retirement lifestyle I want?

Firstly, it is never too early to start saving for your future, and the earlier you start the better.

Pensions have a tremendous compound effect so the basic principle is the more you put in, the more you get out. The way you accumulate your retirement money and how you use it during your retirement will have a big impact on how long it will last – and also the amount of tax you pay.

Here are just some of the steps you can take to improve your pension pot size:

Making the most of pension tax relief

The Government encourages you to save for your retirement by giving you tax relief on pension contributions. This means some of the money that you would have paid in tax on your earnings goes into your pension pot rather than to the government. Tax relief has the effect of reducing your tax bill and/or increasing your pension fund. For a more detailed look at pension tax relief visit https://www.gov.uk/tax-on-your-private-pension/pension-tax-relief

Know your state pension

The State Pension is a weekly payment from the Government that you can receive once you reach State Pension age (66). The current state pension amount is £179.60 a week (2021-22), but you may get more or less than this.

To qualify for the State Pension you need a minimum of 10 years of National Insurance contributions. To find out more on how much State Pension you could receive and when visit https://www.gov.uk/check-state-pension

Investing during retirement

When it comes to investing during retirement, it is important not to view your portfolio with an element of finality. Your investment risk profile and strategy will almost certainly need to adjust to look at ways of making your money work as hard as possible, but with a view to generating earnings to boost your retirement income.

This is a time to look at how balanced your investments are and whether you are exposed to more risk than you are comfortable with. It is a time to review all your investments and decide how much you can afford to withdraw each year and whether this balances with your needs.

Let us take the fear out of your retirement planning?

It is always important to think ahead to retirement and not rush into making life-changing financial decisions. We can help you determine which retirement income approaches may be best for you based on your personal needs and goals. If you are scared of running out of money in retirement and would like to talk to us about your retirement requirements, then please get in touch.

Pension Awareness Day

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Pension Awareness Day

Are you financially match fit for the future?
Its Pension Awareness Day, which started back in 2014 by the team at Pension Geeks and aims to highlight the importance of pension saving.
There are lots of free events on their website including webinars and pension clinics to help both individuals and employers understand pensions and how to achieve the retirement they want.

A strategy of decades

At Ellis Bates we start the planning young! No matter how old you are, it’s always a good time to review your pension savings and update your retirement plan. Understanding your retirement goals during each decade is key to making sure you are able to enjoy and live the lifestyle you want, and which you are working hard for, and eventually want to enjoy when you eventually decide to stop working.

With so much going on in your life – from family and work to pursuing your passions – retirement planning may not be your priority, or even on your radar yet, but it’s your pension and overall short and long term savings plan that will deliver the lifestyle you want.

Take a look at our strategy for each decade at https://www.ellisbates.com/news/retirement-planning-journey/ and we look forward to helping you get financially match fit.

A middle aged couple looking at their laptop to organise their retirement planning journey

Retirement planning journey

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A middle aged couple looking at their laptop to organise their retirement planning journeyWhat you need to consider at every life stage during your retirement planning journey.

When you’re starting out working in your 20s, you may not be thinking about retirement in 40 years’ time. The same goes for your 30s, 40s and even 50s. There is always something on the horizon you could be saving for besides your retirement.

No matter how old you are, it’s always a good time to review your pension savings and update your retirement plan. Understanding your retirement goals during each decade is key to making sure you are able to enjoy and live the lifestyle you want, and which you’ve worked hard for, when you eventually decide to stop working.

Starting to save in your 20s

Though you’re decades away from retirement, your 20s are an important time for pension planning. That’s because the investments you make in these early years will benefit from the most growth potential.

When you start work, if applicable to your situation, you’ll be automatically enrolled into your employer’s workplace pension scheme and they will start to make contributions on your behalf.

You should definitely not opt out of this – even if you feel you could do with the money now.

Staying on track in your 30s

By your 30s, you may have additional financial responsibilities, such as children and a mortgage. These can make it difficult to dedicate as much money and attention to your pension as you’d like.

One way to stay on track is to review your pension contributions at least once a year and make sure you’re increasing them as your income grows. Another consideration is to check your investment strategy. With decades remaining before you’ll access your pension, you might choose to take a higher-risk approach now, and then gradually move into lower-risk investments as retirement grows closer.

Accumulating in your 40s

If your salary follows a typical trajectory, it is likely to start peaking when you’re in your 40s, making this decade a crucial time for pension accumulation. You should, by now, also have a good understanding of the income required to support your desired lifestyle, which will help you plan your retirement income. Based on this, you’ll know if you need to adjust your pension contributions to save enough.

At this life stage, you might have changed employers several times, so it might be sensible to check that you have all of the details for any old pensions and, if not, look to track them down.

Maximising your contributions in your 50s

If your pension contributions have fallen behind in any of the previous decades, it’s crucial to catch up now. As well as your salary sacrifice contributions, you might consider adding lump sums to your pension to help you reach your retirement goal.

If you plan to do this, make sure that you’ve checked what your annual allowance for this tax year is, and how much unused annual allowance you have from the last three years. This will determine how much extra you can contribute and receive tax relief on. For the tax year 2021/22 the annual allowance is £40,000. This includes both contributions paid by you and contributions paid by your employer.

Alternatively, if you’ve stayed on track with all your pension contributions and your savings are at a very healthy level, you might need to take steps to manage your Lifetime Allowance. Currently, the maximum you can accrue within your pensions in your lifetime is £1,073,100, so if you’re anywhere near that number you should seek professional financial advice.

Preparing to retire in your 60s

In the decade before retirement, some people may choose to take a lower-risk investment strategy with their pension savings than in previous years. While this may limit the potential growth of your investments, it can also reduce fluctuations in value, which can help you to plan your retirement income with more confidence.

You’ll also need to weigh up your options for accessing your pension. You might want to take a lump sum or several lump sums, or you might want to take a regular income. There are advantages and disadvantages to each approach, and decisions you make now will affect your income throughout your retirement.

Advice for any age

With so much going on in your life – from family and work to pursuing your passions – retirement planning may not be your priority. But it’s your pension and overall financial situation that will allow you to keep up your current lifestyle and enjoy your golden years. Speak to us today and make sure your plans are on track for the retirement you want.

A pension is a long-term investment not normally accessible until age 55 (57 from April 2028). The value of your investments (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future. You should seek advice to understand your options at retirement.
Accessing pension benefits early may impact on levels of retirement income and your entitlement to certain means-tested benefits and is not suitable for everyone. You should seek advice to understand your options at retirement.
a lady looking out of a window thinking about pension freedoms

Pension freedoms

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a lady looking out of a window thinking about pension freedomsPension Freedoms – Looking for a wider choice of investment options?

Saving for your retirement is one of the longest and biggest financial commitments you will ever make. Imagine you’re retiring today. Have you thought about how you’re going to financially support yourself (and potentially your family too) with your current pension savings? The pension freedoms introduced in 2015 provide even more of an incentive to look again at your retirement savings.

If appropriate to your particular situation, one option to consider is a Self-Invested Personal Pension (SIPP), especially if you’re looking for a wider choice of investment options. It’s an option for people who are more comfortable with investment risk and who have more time to regularly review their pension investments to make sure they continue to meet their needs.

Range and flexibility of investment

First introduced in 1989, this structure provides a range and flexibility of investment that makes a SIPP one of the most flexible methods of saving for retirement.

UK residents can invest money into a SIPP up until the age of 75, and start withdrawing money from as early as 55 (57 from 6 April 2028). Tax relief is available on personal contributions up to £3,600 or 100% of relevant UK earnings (whichever is greater), with tax-efficiency also subject to the pension annual allowance, which is £40,000 for most people and applies to contributions from all sources, including employer. Any unused allowance from previous years may mean more than £40,000 can be contributed tax-efficiently.

Saving for a child or grandchild

Parents can also open a Junior SIPP for their children. It may seem a little premature to start putting money into a SIPP for your child or grandchild at birth, but the tax relief that is available on the contributions makes this a particularly attractive way to save for your child’s future. The money is tied up until they reach retirement age, so this money will not be accessed any time soon.

As with all Defined Contribution pension schemes, the amount that you will have available when you retire depends on the contributions that you (and any employers) have made and how your investments perform over time.

Bring everything together in one place

If you’ve got several pensions, it could make sense to bring everything together in one place. Even if the amounts are small, it all adds up. You can transfer most types of pensions to a SIPP and combine them, letting you manage your pension pot in one place. But SIPPs are not suitable for every investor and other types of pensions may be more appropriate. Once in a SIPP wrapper, your savings will grow free from UK Income Tax and Capital Gains Tax.

Just starting your pension journey?

Investing your retirement savings in a SIPP may not be for everyone. If you are not sure which type of pension scheme is best for you, it’s essential you obtain professional financial advice to review your options. To find out more about pension freedoms and to discuss your options – please contact us.

A pension is a long-term investment not normally accessible until age 55 (57 from April 2028). The value of your investments (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future. You should seek advice to understand your options at retirement.
Accessing pension benefits early may impact on levels of retirement income and your entitlement to certain meanstested benefits and is not suitable for everyone. You should seek advice to understand your options at retirement.
Man on the phone planning to achieve his retirement plans sooner

Boost Your Pension Savings

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Man on the phone planning to achieve his retirement plans sooner

Planning to achieve your retirement goals sooner

Are you ‘mid or late career’ or planning to retire within ten years? If the answer’s ‘yes’, then you probably want to know the answers to these questions: Will I be able to retire when I want to? Will I run out of money? How can I guarantee the kind of retirement I want?

But, for many different reasons, planning for retirement is a commonly overlooked aspect of personal financial planning and this can often lead to anxiety as your age of retirement approaches. We’ve provided four ways to boost your pension savings and help you achieve your retirement goals sooner.

Review your contributions

Sometimes the simplest solutions are the most effective. If you want to boost your retirement savings, the simplest solution is to increase your contributions. You may think you can’t afford to, but even a slight increase can make a big difference.

For those lucky enough to receive a pay rise in line with inflation every year, increasing your pension contributions by just 1% could add thousands to your eventual pension pot. The reason why a relatively small increase in pension contributions can result in such a large increase in the value of your pension pot is because of the power of compounding.

The earlier you invest your money, the more you benefit from the effects of compounding. Adding more money to your pension pot by increasing your contributions just makes the compounding effect even better.

Review your strategy for retirement

A missed opportunity for many pension holders is failing to choose how their pension is invested. Some people leave this decision in the hands of their workplace or pension provider.

Firstly, you should know that you don’t have to hold a pension with the provider your employer has chosen. You can ask them to pay into a different pension, allowing you to choose the provider while considering the type of funds they offer and the fees they charge.

Secondly, many pension providers will give you several options for investment strategies. If you’re in the default option, you could achieve higher returns with a different strategy (though this will usually mean taking on more investment risk). Note that this may not be appropriate in all circumstances, particularly if you are close to retirement.

Know your allowances

When you save in a pension for your retirement, the government adds tax relief on top of the money you contribute, helping you to grow your savings faster. However, there’s a limit to the amount of contributions you can claim tax relief on each year, which is called your ‘annual allowance’. It’s currently £40,000 (tax year 2021/22), and in some cases may be lower.

If you want to contribute more than your annual allowance into your pension in one tax year (for example, if you’ve received a windfall and want to put it aside for the future), it’s worth knowing that you can use any unused allowance from up to three previous years.

So, if you have £10,000 of unused allowance in each of the past three years, that’s another £30,000 you can claim tax relief on this year. The tax relief on this amount would be at least £7,500, depending on your tax band.

Trace lost pensions

Usually, starting a job with a new employer means starting a new pension. And, when that happens, some people may overlook the pension they had with their last employer. As a result, many people have pensions with previous employers that they’ve lost track of – and rediscovering them can give a huge boost to your retirement savings.

You can trace old pensions by getting in touch with the provider. Look through any documentation you still have from your past employers to see if you can find your pension or policy number. If you can’t, you can contact the provider anyway and they should be able to find your pension by using other details, such as your date of birth and National Insurance number.

If you’re not sure who the provider is, start by asking your previous employer.

Will your achieve the retirement you deserve?

When the future is unclear, the thought of retirement may well feel more daunting than exciting. We’ll advise you on how to build the wealth you need to achieve the retirement you deserve. Don’t leave it to chance – to discuss your requirements, please talk to us.

A pension is a long-term investment not normally accessible until age 55 (57 from April 2028). The value of your investments (and any income from them) can go down as well as up, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future. You should seek advice to understand your options at retirement.

Retirement Clinic

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Answers to the myths about your pension questions. If you are approaching retirement age, it’s important to know your pension is going to finance your plans.

Pension legislation is extremely complex and it’s not realistic to expect everyone to understand it completely. But, since we all hope to retire one day, it is important to get to grips with some of the basics. It’s particularly helpful to become aware of the things you may have thought were facts that are actually myths. Here are some examples.

MYTH: The government pays your pensions

FACT: The government pays most UK adults over the pension age a State Pension, which is currently:
– Retired post-April 2016 – max State Pension of £179.60 a week
– Retired pre-April 2016 – max basic State Pension of £137.60 a week (a top-up is available for some, called the Additional State Pension)

Not everyone is eligible for the full amount, which requires you to have at least 35 qualifying years on your National Insurance record. If you have less than ten qualifying years on your record, you’ll receive nothing. Even if you receive the full amount, you’ll usually need to supplement it with your own pension savings.

MYTH: Your employer pays your pension

FACT: Most people are automatically enrolled into a workplace pension. Your employer is usually required to pay a minimum of 3% of your salary into it and you must also pay a minimum of 5%
of your salary.

If you keep your contributions at the minimum level, it might be difficult to save enough for retirement. As life expectancies grow longer, your retirement can be almost as long as your working life. It’s therefore important to put aside a portion of your earnings to create a pension pot that will enable you to receive the income and live the lifestyle you want during retirement.

MYTH: You can’t save more than your lifetime allowance

Fact: There is a lifetime allowance on the benefits you can access from your pension, which is currently £1,073,100 (tax year 2021/22). That doesn’t mean that you can’t withdraw any more after that, but it does mean that you’ll pay a tax charge of up to 55%. However, there are ways of withdrawing the money with a tax charge of 25%.

MYTH: Your pensions provider’s default fund is suitable for everyone

Fact: Most pension default funds will start out with a high-risk strategy and steadily move your capital into lower-risk investments, such as bonds and cash, as you get closer to retirement. This is to reduce volatility in the value of your investments so that you can have a higher degree of confidence in how much you’ll eventually end up with.

If you don’t plan to purchase an annuity, you don’t necessarily need to reduce volatility before retirement. You may be leaving some of your money invested for several more decades, in which case a higher risk strategy may be more  appropriate.

MYTH: Annuities are outdated

Fact: There was a time when almost everyone bought an annuity when they retired, and that time has passed because there are now alternative ways to access your pension savings. But annuities still have a useful role for generating a retirement income and can be an appropriate product for some people. Unlike other pension withdrawal methods, such as drawdown, an annuity offers a fixed income for life, so there’s no risk of your money running out. That’s a crucial benefit for many pensioners.

MYTH: Your can’t pass on a pension

Fact: If you’ve used your pension savings to purchase an annuity, the income from this will usually cease when you die. But if you have pension savings that you haven’t used to buy an annuity (for example, if you’ve been taking an income through drawdown), what’s left can be passed on to a loved one.

If you die before the age of 75 there will usually be no tax to pay by the beneficiary. Otherwise, they will need to pay Income Tax according to their tax band.

Look after your future

There’s a whole lot to think about when you’re planning for retirement. Is it worth paying into private or workplace pensions? Are you saving enough? Which investments should you choose? All these unanswered questions can make planning feel a little overwhelming. To review your situation or consider your options, please contact us – we look forward to hearing from you.

A pension is a long-term investment not normally accessible until age 55 (57 from April 2028). The value of your investments (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future. You should seek advice to understand your options at retirement.