Are you coming up to a time when you’re considering turning your pension savings into a retirement income? We’re here to help with this handy general guide to the stages of planning to take your benefits from any pensions you may have.
Think about what you want your retirement to be like
Here are some of the things you’ll need to think about.
- What pension savings have you got, and when can you take them?
- How much money will you need to live on, now and in the future? As a starting point, the Retirement Living Standards suggests £10,900 a year as the minimum, £20,800 a year as moderate and £33,600 a year as a comfortable standard for a single person (these amounts include State Pension).
- Do you want to retire gradually by reducing your working hours, or retire all at once?
- Most people underestimate how long they’ll be retired for. According to the Office for National Statistics a woman aged 65 can expect to live, on average, about 21 years, and a man about 18½ years.
Ask for retirement quotes
You’ll need to be at least 55 before you can do this.
- Contact all your pension providers and ask for retirement quotes.
- If you’ve got pension savings with NOW: Pensions, Use our member contact form or phone 0330 100 3334 and confirm you want to take your pension savings.
- You can use the government’s State Pension forecast service to get an estimate of your State Pension. You’ll also need to check your State Pension age – the age you can claim your State Pension. This might be different from the age you plan to retire.
Pensions and tax
Tax relief is one of the good things about pension saving. The income tax you would have paid on the earnings that go into your pension gets added to your pension savings instead, as long as:
- the combined contributions from you and your employer to all the pensions you save into in a tax year (from 6 April to the following 5 April) total £40,000 a year or less.
This is called the annual allowance and takes into account your current workplace pension (if you’re saving into one) and any personal pensions you’re saving into.
As long as you stay within the annual allowance of £40,000, you can contribute up to 100% of your salary to your pension savings in a tax year and you’ll still get tax relief.
But, if you want to start taking your pension savings while you’re still paying into a pension, you need to watch out for the money purchase annual allowance. It reduces the combined amount you and your employer can pay into all your pensions, and still get tax relief, to £4,000 a year.
There’s more information about these allowances at gov.uk/tax-on-your-private-pension/annual-allowance.
And when you start taking your benefits, you won’t have to pay extra tax charges as long as the total amount of your pension savings is below the lifetime allowance. This applies to all your workplace pensions including our Scheme, and any personal pensions you’ve got, but not your State Pension. The current lifetime allowance is £1,073,100 and the government has said it will stay at this level until 2026.
If you’ve got pension savings with us, the statement in your retirement pack will show how much of the lifetime allowance your pension savings uses up.
For more information about the lifetime allowance, please visit gov.uk/tax-on-your-private-pension/lifetime-allowance.
Options for taking your pension savings
Stay where you are
If you decide not to do anything now, your pension savings will simply stay invested. What to do with your pension savings is an important decision. You don’t want to rush it.
You can take all your pension savings as cash. A quarter will be tax-free and three-quarters of your cash will be taxable.
Please visit moneyhelper.org.uk/en/pensions-and-retirement/taking-your-pension/taking-your-whole-pension-in-one-go for more information about this option.
Please note: if you’ve got pension savings with us, these are the only options available in the NOW: Pensions Scheme. For any of the options listed below, you’d have to transfer out.
Cash in chunks
As with taking all your pension savings as cash, a quarter of each chunk will be tax-free and three-quarters will be taxable.
Please visit moneyhelper.org.uk/en/pensions-and-retirement/taking-your-pension/taking-your-pension-as-a-number-of-lump-sums for more information about this option.
Buying a pension annuity
You buy a policy known as an annuity from an insurance company. This pays you a guaranteed income for the rest of your life. You’re liable for income tax in a similar way to other income.
There’s a range of choices for annuities, such as an income that increases or starts at a higher level but doesn’t increase, and a pension for a partner if you die before they do. But remember, you can’t change your annuity once it starts to be paid.
Please visit moneyhelper.org.uk/en/pensions-and-retirement/taking-your-pension/guaranteed-retirement-income-annuities-explained for more about annuities.
Adjustable income or ‘drawdown’
You invest your savings and take income out when you need it. You pay income tax on the money you take out in a similar way to other income. You could limit the amount of tax you pay by being careful about how much you take out each year, taking account of any income from other sources.
You have complete freedom and flexibility with your money, but also total responsibility for managing it. You’ll need to keep investing your pension savings and the value of investments can go down as well as up. It’s also necessary to think about how long you will need it and take into account when other income, like your state pension will become available, to make sure you don’t run out of money altogether.
Please visit moneyhelper.org.uk/en/pensions-and-retirement/taking-your-pension/what-is-flexible-retirement-income-pension-drawdown for more information about adjustable income.
Mix your options
You could combine two or more of these options – for example, start by taking drawdown and buy an annuity for guaranteed income later.
Guidance and advice
The following organisations offer free, impartial information and guidance about pension savings.
- Pension Wise: moneyhelper.org.uk/en/pensions-and-retirement/pension-wise. If you’re over 50 you can book a free phone or face-to-face appointment by calling 0800 138 3944.
- MoneyHelper: moneyhelper.org.uk/en/pensions-and-retirement or call 0800 011 3797.
- Citizens Advice: citizensadvice.org.uk or call 03444 111 444 for a face-to-face appointment.
Finding an independent financial adviser
MoneyHelper has a directory of independent financial advisers that specialise in retirement. Visit moneyhelper.org.uk/en/pensions-and-retirement/taking-your-pension/find-a-retirement-adviser or call 0800 138 7777.
The Personal Finance Society (PFS)’s What we do for the public section has a directory you can filter to find independent financial advisers that specialise in retirement. Visit thepfs.org/about-us/what-we-do/for-the-public.
You’ll need to check any adviser you want to use is on the Financial Conduct Authority’s register at fca.org.uk/firms/financial-services-register.