Your pension options: Best to pause at the pot?

Not everyone can afford to dip into their retirement savings – however, this could transpire to be a wise move, as keeping your pension invested for longer means your savings have the opportunity to potentially grow.

Overview:

  • If you’re financially able to leave your pension pot untouched for the foreseeable future, your savings have the opportunity to potentially grow – naturally, however, any investment can fall in value.
  • If you wish to further boost your savings, you can carry on contributing to your pension once you’ve retired, plus you could benefit from tax relief until the age of 75. How much you can pay in is dependent on your employment status, plus whether and how much you have withdrawn from the fund.
  • Your pension scheme or provider might have specific rules around this, so do check, and remember to speak with your financial adviser before coming to any decisions.

You have a range of options at your disposal when it comes to formulating your finances for retirement – yet one major question remains: Just how long will we live for? The answer is that there is no answer! While you’re aware of which savings, assets and sources of income you can draw on, you can’t possibly predict whether those savings will need to stretch to 20 years, 35 years or even longer.

On the other hand, we do know that life expectancy has been steadily increasing. According to the Office for National Statistics (ONS) a 55-year-old man can expect to live until he’s 84, while having a 25% chance of living to 92 years old and a one in 10 chance of reaching the age of 97.1

The same ONS data shows that women are prone to have longer lifespans than men, with today’s average 55-year-old female predicted to live to the age of 87. A quarter of those her age will live to see their 94th birthday, one in 10 will reach the age of 98 and six per cent will turn 100 – nearly double the figure for men.2

 

The ‘beginning’ of retirement

As expert advisers in retirement planning, we understand that retirement looks different for people now compared to previous generations. People are increasingly opting to work beyond the age of 55 – the age at which savers with defined contribution pensions become eligible to start withdrawing their pension. Also, semi-retirement is more commonplace, where people return to work part-time or maybe take time out before returning to their profession or retraining.

Approaching the age of 55 is becoming more like the ‘beginning’ of retirement, and more people are seeking help from financial advisers and asking: ‘Should I leave my pension where it is?’

Here are the key points to consider:

  • If you plan to continue working or have other sources of income – for example, property – leaving your pension invested gives it an opportunity to possibly grow. In other words, when you decide to take the tax-free lump sum that savers are entitled to (currently 25% of your total pension savings), it will be a larger amount. However, be mindful that there’s always an element of risk with any investment.
  • Furthermore, one strategy as a retiree is to live off the dividend income and interest from investments, as opposed to withdrawing the capital saved. After all, the larger your pension, the more potential income it may generate.
  • This needs to be moderated by ensuring that the investment strategy for your pension has been modified accordingly. The reason for this is that the optimal way of investing when accumulating savings is very different to the best way of investing for later life, when preserving and using your savings needs to be carefully balanced.

You can continue paying into a pension and receive tax relief until the age of 75 – bolstering your savings to ensure a comfortable and ‘full’ retirement. (Tax relief is the government top-up to your savings that’s based on your income tax band).

However, be careful not to get caught out by a little-known clause called the ‘money purchase annual allowance’ (MPAA). The rules surrounding this are quite intricate and it’s therefore crucial to seek expert advice, particularly if you haven’t properly ‘retired’ yet and plan to continue working and contributing to your pension.

For context, the MPAA is a limit on the amount that someone can keep saving into their pension while receiving tax relief – currently £4,000 for the 2020-21 tax year. This is usually triggered by withdrawing more than the authorised tax-free lump sum, which can clearly have a huge negative impact on your retirement plans.

Online retirement calculators can be a helpful tool in helping you get a sense of what you need to save and the targets you might want to reach in order to be financially comfortable. However, be aware that they can only do so much – financial advisers, on the other hand, use more sophisticated cashflow planning software that allows for what might happen to your retirement plans were there to be dips in investment markets, and what the financial implications of gradual retirement may be.

Wherever you are in the process of considering your options for retirement, we can help guide you through the process, so reach out to your Wellesley financial adviser today.

Sources:

1,2 Office for National Statistics, Life expectancy calculator, dataset released on 2 December 2019

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

 

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief is generally dependent on individual circumstances.

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