Retiring in 2018? What you need to know
How to work out income in retirement
People tend to get their income in retirement from three broad sources: the State pension, private individual or workplace pensions, and income from other savings and investments, such as ISAs.
It’s important to find out exactly how much you will get from the State Pension and from what age, so there are no nasty surprises. Not everyone will get the full State Pension, currently £159.55 a week (rising to £164.35 in April 2018). You can check your State Pension online and request a pension forecast. You can also check the State Pension age here.
It’s likely you will have a number of different pension schemes if you’ve worked for various employers. Therefore it’s best to check how much they are worth and when they start paying out. Missing pensions can be found using the government’s online pension tracing service.
Armed with this information, it should be easier to work out what your retirement income options are. However, a financial adviser could be really helpful to make sure you don’t outlive your wealth.
What happens before you retire?
You need to claim your State Pension, it won’t be paid automatically.
About four months before your State Pension age you will receive a letter from the government’s Pension Service with instructions on what to do next. You can then claim your State Pension online or by ringing 0800 731 7898. It will be paid from your State Pension age, or later if you have deferred payment. It’s not possible for the State Pension to be paid early.
With private pensions, four to six months before your selected retirement date (often age 60 or 65), your pension provider will send you information about your retirement options, which may include access to online tools. You will then need to decide how and when to take your private pension.
This will involve form filling, and can be supported by guidance from Pensions Wise or paying for professional advice to help with retirement decisions. You can decide to take your retirement income with your current provider, choose a new provider, or defer making a decision.
The options for defined benefit scheme members
DB schemes provide a pre-determined retirement income, based on your salary, years of pensionable service and the accrual rate, or rate at which it built up each year. These types of pensions are guaranteed for life, payable from the scheme Normal Pension Age (NPA), often between ages 60 to 65. It’s possible to take benefits earlier or later, and the retirement income will be adjusted accordingly.
Members can take up to 25% as a tax-free lump sum, the rest must be taken as a retirement income from the DB scheme. Members have the right to a statutory transfer up to a year before their NPA. Unless the trustees of the DB Scheme agree to let members transfer out in the 12 months before their NPA, they will have missed the boat to take advantage of the pension flexibilities provided under DC schemes.
The options for defined contribution scheme members
People with DC pensions have the freedom to access pots from the age of 55 and it’s your choice how and when to take the pension. You can fully cash in your pension or cash in a series of lump sums.
You can also choose to take a flexible retirement income, known as drawdown, where your money continues to be invested and payments are taken as and when they are needed. Or you can use your pension to buy a guaranteed income for life, such as an annuity. People may choose to take a combined approach and use a combination of all three options.
Up to 25% of the pension fund can be taken as a tax-free lump sum.
The tax position on pension income
Income from pensions is taxed in the same way as any other income. Avoid pushing yourself into a higher income tax bracket if possible. Be careful not to take out too much pension income in any tax year if you’re using income drawdown, or cashing in your pension, in case this pushes you into a higher tax bracket. Only take out as much money as you need.
Pension savings can be passed on tax-free to your loved ones. Pensions don’t form part of your estate, so inheritance tax isn’t normally payable. If you die before your 75th birthday your unused pension funds can be paid tax-free to your loved ones either as a lump sum or income. If you die after age 75, any unused pension fund is taxed at your loved one’s income tax rate.
The benefits of deferring your pension
If you don’t need to take some or all of your retirement income, you could consider deferring it to a later date. This should see you receive a higher pension later on.
Anyone who reached State Pension age after 5 April 2016 (provided they defer their State Pension by at least nine weeks), will see the State Pension increase by 1% for every nine weeks it’s deferred.
If the State Pension is deferred by a year, it will increase by just under 5.8%. This means someone on the full State Pension of £159.55 per week (£8,296.60 a year), will get an extra £479 by deferring for a year.
Having private DC pension savings gives people maximum flexibility. If you have more than one pot you can decide to access one pot and defer another until you need it.
Recent research from Aegon found that people considering retiring could add around £46,388 to their pension savings if they delay taking their pension by five years (assumes 4% investment return after charges). This means a 65-year-old could increase their monthly income by £314 from £457 to £771 per month if they defer retirement and keep contributing to their personal or workplace pension until the age of 70.
Those who delay by three years to age 68 can build up an extra £25,542 increasing their monthly income by £164.
What to do if your pension earnings are likely to be low
There’s still time to make pension contributions. But if the retirement income simply isn’t enough to live on, you should think about delaying your retirement. By continuing to work and paying pension contributions, you can significantly grow your pension pot, which will lead to a higher retirement income.
For those relying on the State Pension, you should check your National Insurance Contribution record to see if you have any gaps.
You can also ask for a pension statement online (or call the government’s Future Pension Centre on 0345 3000 168) which sets out your entitlement and any deductions in respect of periods of paying reduced NI contributions.
If you have a shortfall, you may want to consider paying voluntary NICs to achieve at least a minimum of 10 qualifying years needed to gain the new flat rate State Pension, or to maximise the amount you’ll receive.
Watch for pension scams
Scams often start with cold-calling, unsolicited emails or texts making offers which sound too good to be true. By offering free pension reviews or the opportunity to invest in high risk unregulated and unusual investments promising high returns, scammers hope to reel you in. Don’t be tempted to respond to pension cold-callers and keep your hard-earned pension safe.
If you are concerned you have been approached by a scammer and your money is at risk, immediately report this to your pension provider or scheme, or the Pension Advisory Service on 0300 123 1047. If you have signed any papers immediately contact Action Fraud or phone 0300 123 2040.
Kate Smith is head of pensions at Aegon