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Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.

Key points to consider as you prepare to stop working or begin your golden years
Thursday 27 Aug 2020 Author: Tom Selby

While lots of people in their 60s will either have already retired or be planning to retire soon, this is by no means a given.

Brits are living longer, healthier lives than ever before and many choose to keep working – either full or part-time – well into their 60s, 70s and even 80s.

Whatever your intentions it makes sense to get your ducks in a row as soon as possible. And for most people, the first port of call will be their state pension.

STATE PENSION ESSENTIALS

The state pension age in the UK is currently rising to 66 (this will be completed in October 2020), with plans in place to increase it to 67 by 2028 and 68 by 2039.

Anyone who reaches state pension age after 6 April 2016 can claim the full new flat-rate state pension – usually payable to UK residents with a 35-year National Insurance contribution record. In 2020/21 this is worth £175.20 a week.

Anyone who built up state pension rights under the pre-2016 system – such as ‘state second pension’ or SERPS – has these honoured under the flat-rate system, meaning if you reach state pension age after 2016 you might get more than the flat-rate amount.

Those who contracted-out under the old state pension system may get less than the full flat-rate amount.

For those who started receiving their state pension before 6 April 2016, the basic-rate state pension for 2020/21 is £134.25 a week. They may receive additional amounts from SERPS or state second pension on top of this amount.

IMPORTANT STEPS TO TAKE

If you’re planning on accessing your pension in the next five or 10 years – as will be the case for many people in their 60s – you should start planning how you want to generate an income from your fund. Depending on the option you choose, this may have a big impact on how you invest your money.

A 65-year-old planning to stop working at 70 and use their entire fund to buy an annuity, for example, will likely want to reduce the amount of investment risk they are taking as they approach their chosen retirement date. The same could be said for those who plan to take their entire fund as cash.

Failing to do this would leave you a hostage to fortune because stock markets can be volatile, particularly over the short-term. The double-digit falls in market values we saw as a result of COVID-19 in March are a perfect example.

If you’re planning to stay invested in retirement and take an income via drawdown, it is worth reviewing your investments as you approach your retirement date. However, this may not necessitate a big change as your investment time horizon will be longer than someone planning to buy an annuity or take their fund as cash in one go.

If you’re planning to stay invested in retirement and take an income, you can use a product like a SIPP (self-invested personal pension) where you can choose from thousands of funds, bonds and individual stocks at the touch of a button.

ACCESSING YOUR PENSION

If you’re aged 55 or over then you have the option to access your defined contribution pension pot, with 25% available tax-free and the rest taxed in the same way as income.

In developing your retirement income strategy you should think about a wide range of things including your priorities, your income needs and how much risk you are comfortable taking.

If you are planning to keep your retirement pot invested and take an income, it is important you consider the sustainability of your withdrawal strategy.

The earlier you access your pension, the longer it will potentially have to last for in retirement – and if you draw too much, too soon you will risk running out of money early.

Other reasons to save for the future

It’s worth noting that long-term saving isn’t just about pensions. Younger people wanting to prioritise buying a first home may want to save their spare cash in a Lifetime ISA, for example (although you should aim to do this alongside your workplace pension if you can).

It’s also sensible to build up a decent-sized ‘rainy day’ fund in an easy access cash account you can get at quickly in case of emergency. Aiming to have around three months’ fixed expenses in this emergency account is a good place to start, and make sure you shop around for the best interest rate you can find.

CONSOLIDATING PENSIONS

As your chosen retirement date edges closer, you might want to consider tracking down any old pensions you have and consolidating them with a single provider. The Government’s pension tracing service is a good place to start, while plans are also afoot to build pensions dashboards which in the future could allow you to see all your retirement pots in one place online.

There are many good reasons to do this. Firstly, it is an opportunity to lower your charges, something which can have a profoundly positive impact on your retirement, particularly over the longer term.

Secondly, it is a lot easier to manage a single pension versus lot of different pots with different providers. You may also be able to access greater choice and flexibility by transferring, both in terms of the investments available and the withdrawal options open to you.

However, there are also reasons to be careful before transferring your pensions. In particular, some older-style pensions have valuable guarantees attached which will be lost if you switch to a different provider, so make sure you check your documentation and speak to your existing provider before making a transfer.

In addition, some older policies also have exit fees which can make it expensive to move your money.

Pensions and death

When deciding which assets you want to spend first in retirement, a key consideration is often the tax treatment they receive on death. On this front, defined contribution pensions like SIPPs represent a very attractive option.

If you die before age 75, any funds left behind can be passed to your nominated beneficiary or beneficiaries tax-free. If you die after 75, the money you pass on will be taxed in the same way as income when your beneficiary or beneficiaries make a withdrawal.

Because of this, pensions can now be used not just as a retirement income vehicle but also to pass wealth down the generations.

Make sure you tell your pension provider who you want to receive your pension after you die, and keep these nominations updated regularly to take account of any change in your wishes or personal circumstances.

BEWARE LIFETIME ALLOWANCE

For a relatively small section of the population, one of the more complicated parts of the pension system – namely the lifetime allowance – could become a consideration as they approach retirement.

The lifetime allowance is a cap on the amount you can save in a pension over the course of your life and is currently set at £1,073,100.

If you go over the lifetime allowance when accessing your pension you will pay a tax charge designed to return the tax relief you have received. For a defined contribution pension, the tax charge will be 55% if you take the excess above the lifetime allowance as a lump sum and 25% if you take it as income.

If you keep the excess in the fund you will pay income tax on it as normal when you withdraw it. Note that some people who obtained lifetime allowance ‘protection’ previously may be able to protect more of their fund from the taxman.

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