26/11/196 things to avoid when accessing your pension
Thousands of retirees access their money purchase (defined contribution) pensions every year. However, this can involve making many challenging decisions.
- How should you access your savings?
- What is a sustainable annual income?
- What can you do to minimise tax?
Understanding the pitfalls to avoid when you first access your pension can help you build a retirement income that suits you. Knowing your decisions have been carefully weighed up can help you enjoy the next chapter of your life confident in your finances.
So, what should you avoid when planning how to create a retirement income?
1. Do not blow a lump sum without considering the long-term implications
Since 2015, many more pension holders aged 55 or above have been able to take up to 25% of their pension tax-free in an initial lump sum whilst leaving the rest of their pot invested in their pension plan. Whilst it can be a fantastic way to kick-start your retirement, you do need to consider the long-term impact.
Would buying that new car or planning an extended holiday be worth it if you knew it would mean being unable to achieve your goals throughout retirement? In many cases, taking a lump sum is affordable. However, it is essential you look at how it will affect your retirement income for the rest of your life first.
2. Do not hold withdrawals in cash without a plan
If you choose to access your pension flexibly, it can be tempting to make withdrawals and hold in cash. It can provide some reassurances that the money is there if you need it. However, when you consider inflation, cash decreases in value in real terms. In contrast, keeping your pension invested until you need it provides an opportunity for growth.
Of course, growth is not guaranteed and volatility is to be expected. It is important that your investments match your risk profile and you consider dips in the market when you make a withdrawal.
3. Do not access your pension as soon as possible without considering the risks
Most people holding a Defined Contribution pension will be able to access it from the age of 55. It can be incredibly tempting to dip into it at this point but if retirement is still some way off, it may be worth holding off.
Remember, your pension is designed to provide you with an income throughout retirement. Accessing it before you give up work could leave you financially vulnerable later in life. You may find that by making a withdrawal you reduce the amount you can save tax-efficiently into a pension. Lower contributions could again have a significant impact on your retirement income.
4. Do not forget to consider tax when making withdrawals
Many people benefit from the initial tax-free lump sum when accessing their pension mentioned above but further withdrawals are likely to count as income and, therefore, will be liable for Income Tax.
The Personal Allowance, the amount of income you can receive without paying income tax, is £12,500 this tax year. If your total income is greater than this, you will need to consider Income Tax. Keeping track of withdrawals over a tax year is important. You could inadvertently cross into a higher tax bracket if you are not careful.
5. Do not choose the first Annuity provider you find
An Annuity is a policy you purchase with retirement savings that then delivers a guaranteed income, usually for the rest of your life. You do not have to purchase an Annuity but if you do, make sure you shop around.
There are many different Annuity providers on the market, offering different rates. Even a small difference can have a large impact on your overall income and help your savings stretch further. You should also take some time to compare different Annuity products. Some, for example, will link your income to inflation in order to maintain your spending power throughout retirement.
6. Do not be afraid to ask for help
The decisions you make about your pension at the point of retirement can affect your income for the rest of your life. It is not surprising that it can be a daunting and complex decision. Remember to ask for help and advice if you need it.
Friends and family that have already retired can give you help from their perspective but remember your situations and aspirations may be very different. Seeking financial advice can give you the support of a professional that will look at what your options are with you in mind. Some retirees will find that a stable income delivered through an Annuity will be best for them. Others will prefer flexibility. A financial adviser can help you understand the different routes and what they may mean for your retirement. If you have any questions about accessing your pension, please contact us.
Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, 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.