Early retirement typically signifies reaching financial autonomy before the statutory pension age, however the concept of early retirement will differ by each individual and their life objectives.
In the United Kingdom, retirees can begin drawing their State Pension at age 66, although this retirement benchmark is set to increase to age 67 by 6th April 2028. Individuals can also start drawing on their personal or workplace pension savings at age 55, however this is due to increase to age 57 from 6th April 2028.
During the early retirement phase, the focus tends to be on living life to the fullest and accomplishing long-held dreams. One’s spending might then reduce as activity levels decline, only to surge again later, possibly due to rising care needs.
It’s common for individuals to either overestimate their health or underestimate their lifespan. As average life expectancy gets longer, some people may spend over 20 years or more in retirement. Yet, as with many aspects of life, this depends on a number of variables.
In fundamental terms, full retirement implies that your lifetime expenses should not surpass your income plus any remaining assets, such as savings and investments. This can be a complex calculation in many instances. It will require you to weigh your pension and other income sources against your expenditure and evolving needs as you age.
Simultaneously, it’s crucial to consider investment returns and inflation, which refers to the rising cost of living. As we have recently witnessed, everyday prices can escalate rapidly, significantly diminishing the purchasing power of a fixed income or cash savings.
Embracing early retirement doesn’t necessarily translate to a full-stop on professional life. Instead, many individuals transition into more flexible, part-time roles or switch toward volunteering. This shift allows retirees to sidestep less appealing aspects of working life, such as long commutes or stressful work environments whilst retaining many employment benefits.
Unfortunately, early retirement due to ill health isn’t a choice but a necessity, creating unique challenges for some. Time constraints limit opportunities to plan and build retirement finances. Additionally, careful planning for care and support becomes a priority. Making the decision to retire early is significant and requires thorough consideration of multiple factors.
To determine whether you can retire early, you will need to assess your financial standing. This means calculating your total pension pots, tracking lost ones and considering other possible income sources or debts. Additionally, you need to envision your ideal early retirement lifestyle and estimate its costs.
To retire early, starting to plan sooner rather than later is essential. The earlier you start saving, the harder your money can work for you. Please contact us for further information or assistance in navigating your retirement journey. We’re here to help you plan for a secure and fulfilling future.
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THIS ARTICLE DOES NOT CONSTITUTE TAX OR LEGAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH.
TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE.
A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL AGE 55 (57 FROM APRIL 2028 UNLESS THE PLAN HAS A PROTECTED PENSION AGE).
THE VALUE OF YOUR INVESTMENTS (AND ANY INCOME FROM THEM) CAN GO DOWN AS WELL AS UP, 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.
Retirement signifies a well-deserved achievement, a significant turning point in life. It should be a period of anticipation and joy, an opportunity to indulge in activities that bring happiness and contentment. Currently, retirement is marked by increased flexibility in accessing your pension savings. While this offers many choices, it also gives rise to numerous queries.
Retirement planning, accompanied by crucial decision-making and understanding various options, might seem daunting, especially with the escalating cost of living affecting several financial plans. This is where the value of professional retirement advice comes into play. We can help you simplify major decisions by clarifying your options, instilling confidence in your choices and ensuring they are beneficial and tax-efficient.
With the UK witnessing record-breaking inflation in food and fuel prices, the rising cost of living undoubtedly influences our financial plans. If retirement is on the horizon, apprehension about increasing inflation, interest rates and the potential impact of the cost of living crisis on your retirement lifestyle is quite natural.
We can guide you in such circumstances and assist in determining an achievable retirement date based on your total income and expenses. When you include all your potential income sources, not merely your pension savings, you might discover the possibility of retiring earlier than anticipated or gradually reducing work hours before fully retiring. Even if immediate retirement is outside your agenda, we can help you understand when you can afford to retire.
We’ll work with you to analyse all your income sources to estimate your possible annual income post-retirement while ensuring you have sufficient funds for as long as you need. Income sources will likely include pensions, your entitlement to a State Pension, and any savings or investments like Individual Savings Accounts (ISAs). Rental income from a buy-to-let property may also be an option, in addition to any equity in your home that you’re willing to release, either through downsizing or equity release.
As your retirement may last 30 to 40 years, ensuring your income lasts throughout this period is crucial. As we’ve witnessed over the previous few years, inflation rates have reached double-digit figures, so ensuring your money is working hard for you is more important than ever.
Consolidating multiple pensions into one pot could lower annual fees and simplify management. This process involves moving your pension savings from multiple schemes into one, which can offer several advantages. Having all your pension savings in one place allows you to explore and opt for funds better suited to your financial needs and goals. However, seeking professional advice is crucial before deciding on pension consolidation. Individual circumstances vary greatly, and a strategy that works well for one person may not be ideal for another. Always ensure you fully understand the potential implications of pension transfers before proceeding.
Investing a portion of your money during retirement also offers growth and an opportunity to beat inflation. This is where our professional advice is essential, helping to ensure your money is invested wisely and that your investments align with your retirement plans. However, remember that investments can fluctuate in value, and you may get back less than you initially invested.
Overpaying taxes in retirement is another common pitfall. For instance, if you withdraw more from your pension savings than necessary, you could pay more tax than required. We can guide you through this, ensuring you draw your retirement income in the most tax-efficient way. However, bear in mind that tax laws and legislation can change. Your circumstances, including your location within the UK, will significantly impact your tax treatment.
We’re here to provide support and help you navigate your way through retirement planning.
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THIS ARTICLE DOES NOT CONSTITUTE TAX OR LEGAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH.
A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL AGE 55 (57 FROM APRIL 2028 UNLESS THE PLAN HAS A PROTECTED PENSION AGE).
THE VALUE OF YOUR INVESTMENTS (AND ANY INCOME FROM THEM) CAN GO DOWN AS WELL AS UP, 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 FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE MOST BUY-TO-LET MORTGAGES.
Retirement is often seen as the golden phase of life, a period earmarked for relaxation and pursuing personal interests. However, a recent study has pointed towards an increasing trend of ‘retirement anxiety’, especially among individuals aged over 40[1].
This anxiety stems from both financial and emotional concerns, with rising living costs adding to the financial strain. Many adults (39%) fear their savings might not suffice for their retirement years, while 33% worry about affording the activities they wish to undertake.
The initial step towards addressing these concerns is understanding your current financial resources. This includes pensions, Individual Savings Accounts (ISAs), other investments and potential rental income. The State Pension, which stands at £10,600 for the tax year 2023/24, can also supplement your retirement income. By evaluating your existing resources, you can gauge how close you are to the retirement lifestyle you envision.
In today’s economic climate, the study also highlighted that 29% of adults struggle to save for retirement while maintaining their current lifestyle. Regardless of the financial pressures, resisting the temptation to dip into your retirement savings prematurely is crucial. A well-thought-out plan can help you identify areas for potential cutbacks to grow your savings. A good rule of thumb is to allocate 50% of your income to essentials, 30% to discretionary spending, and save the remaining 20% or use it to reduce debt.
Consolidating multiple pensions into one pot could lower annual fees and simplify management. This process involves moving your pension savings from multiple schemes into one, which can offer several advantages. Having all your pension savings in one place allows you to explore and opt for funds better suited to your financial needs and goals. However, seeking professional advice is crucial before deciding on pension consolidation. Individual circumstances vary greatly, and a strategy that works well for one person may not be ideal for another. Always ensure you fully understand the potential implications of pension transfers before proceeding.
The rising cost of living and the current economic climate have caused many adults concerns regarding their retirement plans. With 39% expressing worry about the impact on their future, now might be a prime time to reevaluate how you plan to draw your income during retirement. Retirement no longer signifies a complete withdrawal from professional life for many. The research shows that 17% of adults fear being stereotyped as ‘old’ post-retirement, while 14% are apprehensive about losing their identity once they stop working.
Remember, retirement is what you make of it, whether that means kickstarting a new business, opting for a ‘flexible retirement’, working part-time or choosing a path that brings you joy and aligns with your values. For many, retirement always seems like a distant prospect, even when looming closer than we think. It’s one of those significant life events that can significantly benefit from expert guidance.
We’re here to provide support and help you understand the complexities of retirement.
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[1] https://www.abrdn.com/en-gb/personal/news-and-insights/dont-let-retirement-anxiety-push-you-off-track
THIS ARTICLE DOES NOT CONSTITUTE TAX OR LEGAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH.
A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL AGE 55 (57 FROM APRIL 2028 UNLESS THE PLAN HAS A PROTECTED PENSION AGE).
YOUR PENSION INCOME COULD ALSO BE AFFECTED BY THE INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS.
After a lifetime of hard work, you’ve successfully built a substantial and comfortable retirement account. Congratulations are in order. You’ve officially entered the golden years of retirement! Now, it’s time to enjoy the fruits of your labour, provided you’ve laid the groundwork for a well-prepared retirement. But investing after retirement is quite distinct from accumulating wealth during your working years.
The approach of steadily building your investment portfolio, benefiting from pound cost averaging and return compounding, worked well during your earning years. A low-maintenance ‘set and forget’ strategy, with occasional rebalancing, might have been all you needed. But when you retire, the investment dynamics change.
Entering retirement might bring a sense of accomplishment but can also usher in doubts. You might question whether you’ve amassed enough resources, how to optimise them, and what to do if unforeseen circumstances arise.
If you’re transitioning out of work entirely, you may experience a significant shift in perspective. It can be psychologically challenging to watch your net worth decrease after a lifetime of seeing it grow. Planning ahead can alleviate this stress. Begin by defining your financial goals and estimating their costs. Additionally, don’t underestimate your lifespan. The average life expectancy in the UK during 2023 was 81.77, but if you’re in good health in your sixties, you are likely to live longer[1].
This will likely involve distinguishing between ‘necessary expenditures’ and ‘desired expenditures’. Compare these projected expenses against your known income sources – state and defined benefits pensions, any annuities due – to determine how much your personal pensions, capital and investments need to generate to cover any deficit.
In your retirement income strategy, you’ll encounter three major risks: inflation, longevity and market volatility. Each requires a unique solution. Inflation silently erodes your spending power annually as prices rise. This has become particularly noticeable recently with the sharp increase in the cost of living after a period of relatively low inflation. However, even minor annual increases can compound into substantial hikes over the two decades or so that the average person spends in retirement.
Market fluctuations are an ever-present uncertainty. While risk-taking can yield rewards over the long term, significant swings in a retirement portfolio’s value can be unsettling and potentially catastrophic if withdrawals coincide with market downswings in the early retirement years.
Regarding retirement, your pension options are not solely about investing. You can take two principal courses of action as you approach this phase of your life. You can either continue investing and withdraw money from your pot as needed, a strategy known as pension drawdown, or purchase an annuity, an insurance policy ensuring a steady income for life.
Pension drawdown provides additional flexibility and the potential for higher returns and increased income from your pension pot. Since your pension fund remains invested, market performance can fluctuate. Purchasing an annuity guarantees you a regular income that will last throughout your lifetime. Moreover, annuity rates have increased over the past year due to the rise in interest rates.
Securing a steady income for 30 or so years can be a challenging endeavour filled with numerous pitfalls when drawing from an investment portfolio; the long-term average return and the sequence of returns matter. Poor performance in the initial years can also be costly, even if followed by good returns.
While it’s crucial not to take too little investment risk, de-risking a portfolio might not be the best move if you only need to draw modestly on your money and keep most of it invested for long-term returns. However, withdrawing from your pot means you can benefit less from compounding returns.
Ensuring your pension investment strategy aligns with your needs is essential as you approach retirement. Depending on whether you opt for an annuity or a drawdown, you might need to adjust the asset mix in your portfolio to meet your retirement objectives.
It’s time to adopt a strategic approach to investing that generates a steady income and ensures the longevity of your retirement fund. Whether drawing down your capital or opting for income-producing assets, the choice is yours.
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[1] https://www.macrotrends.net/countries/GBR/united-kingdom/life-expectancy
THIS ARTICLE DOES NOT CONSTITUTE TAX OR LEGAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE.
THE VALUE OF YOUR INVESTMENTS CAN GO DOWN AS WELL AS UP, SO YOU COULD GET BACK LESS THAN YOU INVESTED.
As we navigate life’s journey, retirement presents both a dream and a challenge. It’s the stage where we finally enjoy the fruits of our labour, a time for relaxation, exploration and personal growth. But the question that often looms is how can we ensure a steady income stream that keeps pace with our aspirations and maintains our lifestyle? Enter the world of annuities.
Annuities in recent years have often been overlooked in the retirement planning conversation. But current heightened interest rates have increased demand for annuities, offering unparalleled peace of mind, knowing that your basic needs will be covered, irrespective of how the financial markets perform.
They offer a steady, guaranteed income throughout your retirement years or for a specific period. But given the irreversible nature of purchasing an annuity, it’s imperative to thoroughly explore your choices, select the most suitable type and secure the best possible deal.
Annuities provide a practical means of converting your accumulated pension savings into a lifelong source of income. Comparing rates across various providers is essential once you determine your required income level. This process, known as the ‘open market option’, allows you to bypass your provider’s offer and potentially secure a higher rate with another provider.
Shopping around could boost your retirement income by as much as 20%. To put it in perspective, simply by exploring your options, you could increase your retirement earnings by nearly £6,000. Recent analysis reveals that a 66-year-old with a £100,000 pension pot can now purchase an annuity yielding an annual income of £7,000 – an increase of £174 compared to last year[1].
The analysis highlights a striking difference between the best and worst annuities available. For a 66-year-old with a £100,000 pension pot, rates can vary by up to 3.6% – equating to a potential annual income discrepancy of £254 or £5,945 over an average retirement period[2].
Securing the right annuity for your needs can seem daunting, given the variety of options available. This one-time, typically irreversible decision is vital, and understanding the different types of annuities can greatly facilitate the process.
When choosing an annuity, you can select a conventional level-income annuity, which ensures consistent payments throughout your life. Alternatively, an increasing annuity starts with a lower initial income, but your payments increase annually in line with inflation or a predetermined rate, such as 3% or 5%. It’s essential to carefully consider the options’ costs and benefits to make the most suitable choice.
Your marital status is another significant factor in selecting an annuity. If you opt for a single-life annuity, it will only pay out during your lifetime. In contrast, a joint-life annuity provides a full payout to you during your life and, after your death, it typically pays 50% of that amount to your partner until their demise.
Another option worth considering is a guaranteed income period. Under this plan, payments continue until the end of a chosen period (usually five or ten years), even if you pass away prematurely. In such a scenario, the income would be paid to your beneficiaries or estate, offering them financial security.
An enhanced annuity may be the right option for those with certain lifestyle conditions or medical history. Whether you smoke, are overweight, have type 2 diabetes, or have suffered from cancer, heart disease or other life-threatening conditions, you may be eligible for an enhanced annuity, which results in higher payouts.
The rates are increased to reflect the potential impact of these conditions on your lifespan. Even conditions like excess weight or high blood pressure could qualify you for an enhanced annuity.
When contemplating the purchase of an annuity, you must receive all necessary professional financial advice and guidance before deciding. We’re here to help you navigate these complex decisions and explore your options.
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[1] As of 30/9/23, a standard lifetime annuity with a rate of 7% for a single life with a £100k premium, 66 years old, with a 5-year guarantee. Based on a level benefit that is paid monthly in advance.
[2] As of 30/09/2023, Legal & General Retail estimates that an average 66-year-old with a standard level of health will have a life expectancy of 90 years.
THIS ARTICLE DOES NOT CONSTITUTE TAX OR LEGAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE.
A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL AGE 55 (57 FROM APRIL 2028 UNLESS THE PLAN HAS A PROTECTED PENSION AGE).
THE VALUE OF YOUR INVESTMENTS (AND ANY INCOME FROM THEM) CAN GO DOWN AS WELL AS UP, 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.
Managing retirement plans and paperwork can seem daunting in our fast-paced, constantly evolving world. Yet, it’s an essential chore that should not be pushed aside. Not staying up-to-date with your retirement plans can result in financial pitfalls that could easily have been avoided.
But worryingly, according to new research, 32% of Britons place pension administration at the bottom of their to-do list, even ranking it below managing hair and beauty appointments or planning holidays [1].
Interestingly, more than a fifth (22%) of pension savers confess that they fail to check their pension annually, not due to apathy but because they are uncertain about the process. An additional one in seven need help finding their pension information.
As Pension Engagement Season gears up, it is concerning to note that pensions rank last on Britons’ ‘life admin’ to-do lists. This is despite pensions’ crucial role in shaping people’s financial futures. The task of managing personal appointments with hairdressers or beauticians takes precedence over pension paperwork for 24% of respondents. Meanwhile, 18% prioritise planning holidays over reviewing their pension plans.
When consumers finally tackle pension administration, the research reveals that 27% only check their pension once a year or less frequently. Alarmingly, 14% confess to never having inspected their pensions.
Among those who do not check their account at least annually, a fifth (22%) admit that they refrain from doing so simply because they lack knowledge about the process. This percentage escalates to a third (34%) among 35-54-year-olds, compared to 26% of 18-34-year-olds and 11% of over-55s.
A total of 16% of those who infrequently check their pension claim that they do not know where to access the information. Furthermore, 15% confess that they don’t know how to check it, while 13% feel their savings are too meagre to warrant engagement with their pension. Additionally, 12% avoid reviewing their pensions because they find the process overwhelming.
It’s not uncommon for many of us to be in the dark about the exact amount we’ve saved up in our current pension plan. However, it’s crucial to clearly understand your savings as this can reveal gaps between what you already have and what you might need for a comfortable retirement.
Your review should consider everyday expenses, occasional splurges like gifts and holidays, large purchases, and an emergency fund for unexpected costs. Remember to include any pensions from former employers or personal plans in your assessment. If you suspect that you’ve misplaced some pension information over time, the government’s pension tracker website is a resource that could help.
In today’s economic climate, short-term spending needs may take precedence. Nevertheless, when presented with an opportunity to join a workplace pension scheme, it’s generally advisable to seize it. Most employers must auto-enroll their employees into a workplace pension scheme, but you might still be offered a pension plan even if you’re not eligible for auto-enrolment.
Workplace pension schemes comprise your contributions (usually 5% or more of earnings, this can vary depending on the arrangement with your employer), deducted directly from your salary before tax, and your employer’s contribution, which must be at least 3% of your earnings. Many employers offer to match your additional payments, so ensuring you’re maximising this benefit is worthwhile.
Consider upping your pension contributions. Even small, regular monthly payments can accumulate significantly over time, thanks to the power of compounding. Also, contemplate making one-off payments into your pension, such as when you receive a work bonus or an inheritance.
Life is ever-changing, and your retirement plans should adapt accordingly. Your envisioned retirement age may have shifted, or your financial circumstances may have evolved. It’s important to note that you don’t have to wait until the State Pension age (currently 66) to access your workplace or private pensions. You can typically begin drawing from these at age 55, although this will increase to 57 from 2028.
However, accessing your pension benefits early could restrict future savings and leave you with a smaller retirement income. Furthermore, your investment choices when establishing your plan may need to be revised. Regular reviews of your pension investments are essential to ensure they continue to align with your goals.
Pension savings, being invested funds, can fluctuate in value. However, these fluctuations shouldn’t cause undue worry. Remember, pensions are long-term investments that usually yield better returns over extended periods than traditional savings accounts.
To mitigate the risk of significant fluctuations, consider diversifying your portfolio by investing in various asset types. Most workplace default investment options already provide this diversification, and many personal pensions offer packaged investment options for those who prefer to avoid building their portfolios.
Pension administration can prove challenging, especially if you’ve accumulated several plans over the years from different jobs. Consolidating these into one plan can streamline your paperwork, provide a clearer view of your overall pension value, simplify investment tracking and potentially reduce charges.
However, consolidation is only suitable for some. There’s no guarantee of a better pension plan through consolidation, and you might lose valuable benefits or guarantees from other plans. Thus, seeking advice before consolidation is crucial.
For more information or to discuss your retirement plans, feel free to get in touch. We’re here to help you navigate your retirement planning journey with confidence.
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[1] Research conducted amongst 2,000 UK adults on behalf of Standard Life by Opinium from 29 August–1 September 2023.
THIS ARTICLE DOES NOT CONSTITUTE TAX OR LEGAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE.
A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL AGE 55 (57 FROM APRIL 2028 UNLESS THE PLAN HAS A PROTECTED PENSION AGE).
THE VALUE OF YOUR INVESTMENTS (AND ANY INCOME FROM THEM) CAN GO DOWN AS WELL AS UP, 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.
Financial adviser, Andy Kirk, weighs up the risks and long-term implications of hitting the pause button by halting your pension contributions as a quick financial fix.
In times of financial stress or uncertainty, it may be tempting to hit pause on your pension contributions. However, before you do so, it’s essential to understand the long-term implications this decision may have on your retirement savings plan.
Decisions to increase short-term income can dramatically affect future wealth. It may seem like a viable solution to current financial struggles to reduce or stop pension contributions. However, this short-term increase in take-home pay can significantly impact long-term pension values. Higher earners stand to lose almost four times as much.
Pension contributions attract tax relief. Research[1] shows that a worker earning £35,000 annually and saving 5% in a workplace pension scheme matched by their employer could increase their take-home pay by £117 monthly, or £1,404 yearly, if they stopped paying into their pension[2]. But they would lose £341 monthly, or £4,092 yearly, in pension savings due to lost matched contributions and tax relief.
Pension wealth hugely benefits from compounding – the longer money is invested, the more it could grow. In 20 years, the £4,092 could have boosted the pension pot by £10,575 through investment growth if contributions hadn’t been paused.
For higher rate taxpayers earning £70,000, the difference is even more significant. They could increase their take-home pay by £3,360 yearly by stopping 8% matched pension contributions. However, their pension pot would be worse off by £12,192 in that period. Their pension savings would also be worse off by a projected £31,508[3] in 20 years if they had not taken a one-year pause.
The research involving over 6,000 UK adults shows that the past two years have strained people’s finances. A third (33%) of workers across all age groups confessed to decreasing or stopping their pension contributions. Among younger workers, the figures are even more alarming – nearly half (49%) of workers aged 18-34 are looking at the impact of adjusting their pension contributions.
Exiting your savings scheme means forgoing the benefits of saving through a workplace pension. Initially, you’ll miss out on your employer’s contribution. Any breaks in savings could also delay your retirement or mean you’ll have less income when you stop working. Catching up on any breaks will mean saving even more when you resume to achieve your desired lifestyle in retirement.
While the number of people opting out of schemes remains relatively low, it’s clear that many have considered the option in a bid to boost their take-home pay. However, the decision to pause pension contributions must be weighed carefully, especially for those at the start of their career.
Stopping or reducing contributions might be necessary for some, but decisions mustn’t be taken impulsively. Figures from the research show that the money gained in the short term doesn’t seem like great value when compared to what’s being given up in the long term.
While pausing pension contributions may seem like a quick fix in the short term, it could have substantial long-term costs. It’s essential to fully understand these implications before making a decision that could affect your financial security in retirement. For further information or guidance, please get in touch with us. Your financial future is too important to leave to chance.
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Source Data: [1] Royal London commissioned a survey by Opinium between 1–8 August 2023, with a sample of 6,003 nationally representative UK adults.
Source Data: [2] £1,404 per annum saving for a worker aged 40 earning £35,000 and previously contributing 5% of their salary to their pension.
Source Data: [3] 20-year projection, based on a 5% investment growth net of charges.
THIS ARTICLE DOES NOT CONSTITUTE TAX OR LEGAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE.
A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL AGE 55 (57 FROM APRIL 2028 UNLESS THE PLAN HAS A PROTECTED PENSION AGE).
THE VALUE OF YOUR INVESTMENTS (AND ANY INCOME FROM THEM) CAN GO DOWN AS WELL AS UP, 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.
If you are thinking of accessing your pension, Scott Miller, one of Fairstone’s Independent Financial Advisers, takes you through the options and the potential implications.
A surprising 43% of individuals over 55 need to be made aware that they can withdraw 25% of their pension pot tax-free, according to recent research[1]. Knowledge could lead to better decision-making when it comes to accessing pension savings.
Similarly, 52% of those surveyed between the ages of 50 and 54 were also unaware of this rule, indicating a widespread lack of understanding about pension withdrawal options.
The study found that among the 57% of over-55s who know about the tax-free pension withdrawal option, 21% have already taken advantage of this benefit, while 9% plan to do so in the future.
Most individuals who plan to take their tax-free lump sum did or will do so at retirement (69%). However, 16% have made or intend to withdraw at different points during retirement.
The study emphasises the importance of understanding the various options available when withdrawing from your pension pot, including the 25% tax-free cash entitlement.
Considering factors such as whether to take the lump sum all at once or split withdrawals into smaller chunks over time and the potential implications and benefits of each approach are essential.
Typically, most people can withdraw 25% of their total pension pot tax-free, although this may vary depending on the type of pension plan and if you’ve exceeded your lifetime allowance. The remaining 75% is subject to Income Tax when withdrawn.
Generally, you can access your pension savings, including the tax-free lump sum, at age 55 (rising to 57 in 2028). In rare cases, you may be able to access your pension earlier due to ill health or a protected scheme.
This depends on your pension product and its terms. Taking smaller withdrawals over time can be beneficial in most cases, as it allows for potential growth and tax-efficiency.
It’s essential to consider the longevity of your pension savings throughout retirement. Taking too much too soon could result in running out of funds later in life. Delaying access to your savings may allow for additional growth.
Accessing your pension savings can impact state benefits, such as Universal Credit or Pension Credit. Additionally, taking a tax-free lump sum won’t affect the amount you can contribute to your pension plan, but accessing taxable income may reduce your annual allowance.
Understanding your pension withdrawal options and seeking professional guidance or advice will help you make informed decisions and maximise your retirement savings. To learn more about how we can help you, please don’t hesitate to contact us.
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Opinium conducted research among 2,000 UK adults aged 18+ between 12–16 May 2023 for Standard Life, part of Phoenix Results have been weighted to be nationally representative.
A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL AGE 55 (57 FROM APRIL 2028 UNLESS THE PLAN HAS A PROTECTED PENSION AGE).
THE VALUE OF YOUR INVESTMENTS (AND ANY INCOME FROM THEM) CAN GO DOWN AS WELL AS UP, 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.
THIS ARTICLE DOES NOT CONSTITUTE TAX OR LEGAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL TAX ADVICE.
It’s useful to have choices if you’re considering topping up your pension but taking advice will help you to avoid the pitfalls and take advantage of the opportunities of either route. Ajay Naik, one of Fairstone’s team of independent financial advisers takes you through the detail.
First, it’s crucial to recognise the advantages of investing in your pension plan. Saving for your future is essential for your future financial independence and security, and your pension plan is one of the most tax-efficient ways to do it.
Pension tax relief on your contributions, employer contributions (especially if they offer a matching scheme) and investment growth potential are just a few of the benefits of investing in your pension plan. All these factors make contributions to your pension plan an effective way to maximise your savings.
If you suddenly receive a large sum of money, such as an inheritance, work bonus or tax refund, should you invest it in your pension plan?
Exceeding your regular pension contributions can bring you closer to achieving your retirement savings goals. A lump sum payment is a quick and straightforward method to enhance your plan while utilising your pension annual allowance before the end of the tax year.
Investing your lump sum as soon as possible allows it more time to grow, giving you more money during retirement. Additionally, depositing a work bonus into your pension plan could save you on tax and National Insurance deductions.
However, ensure that your payment doesn’t exceed your pension annual allowance to avoid tax charges. For the 2023/24 tax year, the pension annual allowance is set at £60,000, and this is the total value that can be paid into all your pensions each tax year before triggering a tax charge. You can however, carry forward unused allowance from the previous three tax years, along as you meet the required criteria.
Lower limits may apply if you’re a high earner or you’ve already accessed a pension this tax year.
If you can’t afford a lump sum payment but still want to save more for your future, consider increasing your regular contributions. This is an excellent habit to develop, as even small increases can accumulate over time when combined with tax benefits and potential investment growth. Additionally, regular contributions can benefit from pound cost averaging.
You can also make contributions to your spouse’s or partner’s pension. These contributions will count towards their annual allowance, not yours – so it’s essential to make sure they have enough allowance left before making any payments on their behalf. You can contribute up to £2,880 a year to the pension of a non-earning spouse, partner or child which becomes a contribution of £3,600 into the pension with tax relief.
Pound cost averaging involves investing smaller sums at regular intervals instead of a more significant amount as a lump sum. This strategy can reduce the risk and impact of investing a considerable sum just before potential market drops.
Let’s say you have £12,000 to invest. If you put the entire amount into the market and then experience a 10% drop over the next year, your investment would decrease in value significantly. However, if you decide to invest £1,000 each month across the year and the market experiences the same drop, you would buy into the market at a lower price each time. This means your overall investment may only decrease by 5% in total.
Of course, if the market rises instead of falls during that period, you’ll make smaller profits than you would have with a lump sum investment. But it’s important to remember that markets tend to recover long-term. While pound cost averaging might not necessarily yield better returns, it could make it easier for you to handle significant market drops.
It is a valuable investment strategy for those looking to minimise risk and manage the impact of market fluctuations. Investing smaller amounts at regular intervals can reduce losses and maintain a more balanced portfolio.
Deciding on the best pension strategy for your future can be daunting. Ultimately, your best choice depends on your financial situation, goals and risk tolerance. Take the time to assess your current circumstances and evaluate each option thoroughly. And keep in mind that the last day of the tax year is 5 April 2024; that’s your deadline for maximising your pension annual allowance for the 2023/24 tax year.
By planning ahead and choosing the right strategy, you can secure a comfortable and financially stable retirement. We will dedicate our time, expertise and experience to creating a retirement plan centred on what you want your retirement to be. To discuss your options or to find out more, please get in touch with us.
At Fairstone, we have a wide range of financial experts across the country who can advise you on every aspect of investing in a pension. They’ll be happy to answer any other financial questions you may have. Sign up to our newsletter too and stay up to date with our latest news and expert insights.
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A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL AGE 55 (57 FROM APRIL 2028 UNLESS THE PLAN HAS A PROTECTED PENSION AGE).
THE VALUE OF YOUR INVESTMENTS (AND ANY INCOME FROM THEM) CAN GO DOWN AS WELL AS UP, 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.
A significant change is on the horizon that may affect when you can access your pension money. Lauren Herrick, one of Fairstone’s team of Independent Financial Advisers takes you through this change, and its potential implications, so you can confidently prepare for retirement.
The current Normal Minimum Pension Age (NMPA) is 55, which means you can start taking your pension savings once you reach that age. Some exceptions exist, such as if you’re experiencing ill health or have a lower protected pension age. However, the general rule applies to most people.
Starting from 6 April 2028, the NMPA will increase to 57. This change may affect you differently depending on your birth date. What does this mean for you?
It’s a good idea to review any existing plans to determine if the change will affect them. You may need to plan for another couple of years of saving, which could alter your retirement income. No action is required if you didn’t intend to access your pension savings before turning 57.
Regularly reviewing your retirement plans is a smart habit, especially as you approach the age when you’d like to start accessing your pension savings.
You have two options – carefully consider which one best suits your circumstances.
Option 1: Access your pension savings before the deadline
If you don’t want to wait until you’re 57 to access your pension savings, you’ll need to begin with- drawing funds between turning 55 and 6 April 2028. Remember that you can access your pension savings without taking large or regular amounts; you can decide what’s right for you. However, obtaining professional financial advice before making any decisions is essential.
Remember that leaving your pension savings invested longer allows for potential growth. Also, note that taking taxable money from your plan (anything exceeding your tax-free entitlement) may reduce the amount you can contribute to your plan due to the Money Purchase Annual Allowance.
Option 2: Wait until you turn 57
No action is needed if you weren’t planning to access your pension savings before age 57. You can access your pension savings at any time after turning 57. However, if you crystallise funds before 6 April 2028, you’ll retain the opportunity to do so before age 57.
No action is required, as you will already be 57 when the change takes effect, and your retirement plans won’t be impacted.
Even if you can no longer access your money at 55, your retirement date may still be set to your 55th birthday. It’s worth checking it now.
You can change your retirement date at any time, but the chosen date can affect your plan. For example, if you’ve invested in a lifestyle profile, your pension investments are designed to transition to lower-risk investments as you approach your retirement date. This helps reduce the impact of market fluctuations on your pot’s value.
If your retirement date is set to your 55th birthday, but you don’t plan to access your money until 65, your investments won’t align with your plans, potentially affecting the value of your pension savings when you’re ready to withdraw them.
Retiring is a big decision. You’ll have different options when it comes to taking your money. We’ll help you find suitable options so you can make the right choices. To discuss your retirement plans, please get in touch with us for more information.
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A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL AGE 55 (57 FROM APRIL 2028 UNLSS THE PLAN HAS A PROTECTED PENSION AGE).
THE VALUE OF YOUR INVESTMENTS (AND ANY INCOME FROM THEM) CAN GO DOWN AS WELL AS UP, 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.
