We have more control than ever over how and when we can spend our pensions, but careful financial planning is necessary if you want to avoid the risk of outliving your retirement savings.
Pension freedoms introduced in 2015 mean that you can take up to 100% of your defined contribution pension savings at retirement if you want to. However, if you choose to do this you not only risk ending up with a hefty tax bill, but you could quickly find you run out of funds to pay for your retirement.
Here, we look at some pension pitfalls to avoid, as well as offering some tips to help ensure your retirement savings don’t run out too soon.
Work out your retirement budget
Before you stop work, it’s essential to work out a thorough retirement budget, so you’ll you know exactly how much you are going to need to fully fund your retirement. Go through your bank statements and make a list of all your outgoings, breaking them down into essentials, such as food, utility bills and mortgage or rent costs, and non-essentials, such as spending on hobbies, or other things which are nice to do or have, but wouldn’t impact on your standard of living if you stopped them. Understanding how much you’ll need can help you work out whether you’re likely to face a pension shortfall.
Increase your pension contributions
It’s never too late to boost your pension contributions so that you hopefully have a bigger retirement savings pot available when you stop working. Remember that pension contributions attract valuable tax relief. For example, if you’re a basic rate taxpayer, you receive tax relief at the basic rate of 20% on contributions made to workplace and personal pensions, so for every £80 you pay in to your pension, the taxman will top this up to £100. Higher and additional rate taxpayers receive tax relief at 40% and 45% respectively on contributions.
Consider working for longer
Delaying your retirement means you can make pension contributions for longer, reducing the risk that you’ll outlive your pension savings when you do eventually stop working. There is no longer a default retirement age, although some employers do have a compulsory retirement age, particularly if the work involved is physical. If you’re keen to work for longer, ask your employer about the available options. For example, they may allow you to work part-time, or more flexibly.
Work out how you’ll take your pension
There are several different ways to receive an income from your pension.
Drawdown schemes
Allow you to take money out of your pension whilst leaving the rest of your savings invested, with the aim that your remaining capital will continue to grow.
Annuity
You hand over some or all of your pension to an insurance company and in return receive a guaranteed income for life or for a fixed term.Choosing the right option, or combination of options, for you can be confusing, so you may want to seek professional financial advice to help you work out which will make your retirement savings stretch furthest.
Think about the impact of withdrawals on your tax bills
If you’re tempted to take large lump sums from your retirement savings, bear in mind the impact this could have on your tax bills. Only the first 25% of any sum you withdraw will be tax-free, with the remaining amount taxed at your marginal rate. Taking smaller sums out each year over a period of several years can help you keep tax bills to a minimum, and should mean your retirement savings last longer.
Explore ways to boost your retirement income
If it’s looking as though your pension savings may not be enough to fund your retirement, you’ll need to look at ways you might be able bring in some extra cash when you stop work. If, for example, you have a spare room, you might want to consider letting this out to a lodger. Under the government’s ‘rent-a-room’ scheme, you can earn up to £7,500 a year tax-free from letting out furnished accommodation in your home.
