Pension pots and retirement savings are often the most money many people ever have access to, so it is important that those retiring in 2022 understand their options and make informed decisions. Many of the mistakes people make with their hard-earned savings could have been easily avoided.
To help, WEALTH at work, a leading financial wellbeing and retirement specialist, has created a list of top 10 tips for those who are thinking about retiring in 2022.
1. Estimate how much you will need in retirement – Work out how much income you are going to need in retirement including essential income to meet your day-to-day living expenses (such as household bills) and discretionary expenditure (such as holidays and hobbies). Don’t forget that when you retire you are likely to be paying less income tax, no National Insurance (NI), mortgages and loans may be paid off, you will have no more pension contributions, and any children are likely to be financially independent. With these reductions in costs, the income you need in retirement is likely to be significantly less than you require during your working life. In fact, it may be possible to need an income equivalent to half your working salary.
Recent research from The Pensions and Lifetime Savings Association (PLSA)[1] found that a single person now needs a post-tax annual income of £10,900 for a minimum standard of living in retirement (this would cover all a retiree’s needs plus enough for some leisure activities such as a week’s holiday in the UK and eating out occasionally); £20,800 for a moderate standard of living (a two week holiday in Europe and more frequent eating out); and £33,600 for a comfortable standard of living (being able to enjoy luxuries like regular theatre trips and three weeks holiday in Europe a year). A couple would need £16,700, £30,600 and £49,700 respectively.
2. Check if you can afford to retire – Do you have enough put aside to be able to afford to retire, or do you need to work a little longer, or perhaps work part-time? Research has found that most people live longer than they expect, so keep this in mind when doing your sums. The Office for National Statistics (ONS)[2] estimates that life expectancy in the UK for people aged 65 will be 85 years for men and 87 years for women.
3. Remember pensions are not the only source of income – When it comes to retirement, there are many assets such as ISAs, shares and general savings, which can be used as potential sources of income in addition to your pensions. It is a good idea to work out which assets you have, what they are all worth, and the best way to use them to make sure you are not paying unnecessary tax.
4. Don’t pay unnecessary tax – Usually only the first 25% of a defined contribution (DC) pension is tax free (the calculation for a defined benefit scheme will be different); the remaining 75% is taxed as earned income. Unfortunately, in recent years many people have found themselves paying more tax than they need to. For example, some people have taken their pension as a cash lump sum, not realising that it made them a higher rate tax payer! You may be better off taking a smaller amount each year from your pension, keeping within your tax bracket, and then to top it up with withdrawals from your ISA, as this is paid tax free.
5. Decide how to access your pension income – If you have a DC pension, you can access your savings from age 55 and will need to decide whether you want to do this through income drawdown, buying an annuity, taking it as a cash lump sum, or a combination of these options. Help and support is available to help you understand what each of these options are, and which might be best for you. Speak to your employer about any support that they provide, such as financial education and/or access to regulated financial advice. You can also visit www.moneyhelper.org.uk/en/pensions-and-retirement/pension-wise.
If you have a defined benefit (DB) pension, your pension income is usually based on a rate set by the scheme (the accrual rate) and typically is a percentage or fraction of your salary for each year you have been an active member of the scheme. A DB pension usually has a set retirement age which could, for example, be on your 60th or 65th birthday; however, you may be able to receive benefits earlier or later than this. Some people may want to transfer their DB pensions into a DC pension fund so that they can have greater flexibility over their savings. However, it is important to understand the advantages and disadvantages of this first, as well as the associated risks such as falling for a scam, buying inappropriate retirement products, paying more tax than necessary and ultimately running out of money.
6. Shop around – Make sure that you shop around before you purchase any retirement products. Which?[3] found that the difference between the cheapest and most expensive income drawdown plan for a £250,000 pot was £12,300 lost in charges over a 20 year period. It is important to not only check fees, but make sure it suits your needs, and that you can withdraw cash as and when you want it, and for as long as you need it.
7. Keep pension beneficiary details up-to-date – Pensions can be a very tax efficient way to pass on your wealth when you die and are not usually subject to inheritance tax. When a DC pension holder dies, the pension provider chooses who receives the pension pot. You can inform the provider of your wishes by nominating beneficiaries, so it is important that you review and keep these details up to date. If you die before the age of 75, the person who inherits your pension pot can draw on the money as they wish, without paying any income tax either. However, if you are 75 or over when you die, a beneficiary of your pension pot will have to pay income tax on any withdrawals at their marginal rate (i.e. the highest rate of income tax that they pay). This means that any remaining pension can pass onto your beneficiaries’ tax free; subject to not exceeding the current £1,073,100 lifetime allowance, and providing that the company pays out within two years of the date of death.
If your beneficiary is entitled to continue receiving payments from an annuity or defined benefit pension after your death, then these payments will be subject to income tax at their marginal rate.
8. Regulated financial advice can support you through retirement – The FCA[4] found that only 10% of pensions were accessed to purchase an annuity in 2020/21. Increasing numbers are accessing their pension through income drawdown. However, Pensions Policy Institute (PPI) research[5] has found that cognitive decline during retirement may make it more difficult for some people to make appropriate decisions about how to access their savings in their older years.
Regulated financial advice can be a solution to this and may actually cost the same, if not less than buying retirement products, such as annuities, through some online brokers. It can also be seen as an investment as an Adviser will look at all of your assets, work out the most tax efficient way for you to fund your retirement and then put a bespoke plan in place for you, which will support you throughout retirement.
9. Protect yourself from scams – Scammers often use highly professional looking websites and marketing literature to lure you in, and tend to sound completely legitimate when they contact you. It’s easy to see why so many people are fooled, and it isn’t small amounts of money which are being taken. Between January and May 2021, pension scam losses totalling over £2.2 million were reported to Action Fraud.
New regulations came into force in November which means suspicious transfers can be stopped from ending up in the hands of a fraudster, as pension trustees and scheme managers now have new powers to intervene, but you still need to be on your guard. Whatever you’re planning to do with your retirement savings, it’s vital to check whether the company that you’re planning to use is registered with the Financial Conduct Authority (FCA). You can also visit the FCA’s ScamSmart website which includes a warning list of companies operating without authorisation or running scams.
10. Choose what is right for YOU – The ability to access your pension income in a way which works for you is a great option to have, but it is also a frightening or overwhelming prospect for many. It is vital that you make sure that you fully understand all of your options, to be able to make informed decisions that best suit your needs.
Jonathan Watts-Lay, Director at WEALTH at work, comments; “We spend many years saving for our retirement and it is heart-breaking when people make mistakes with their hard-earned savings which could have been so easily avoided.”
Watts-Lay concludes; “Many employers with retiring employees now offer access to financial education, guidance and even regulated financial advice, so it is always worth speaking to them to find out what help is available.”
[1] PLSA research
[2] ONS Life expectancy calculator
[3] Which?
[4] FCA