Whether you’re excited or daunted by the prospect, if you have a defined contribution (DC) pension, there may be several options to weigh up when making decisions about your retirement income.
Jonathan Watts-Lay, director at WEALTH at Work, a specialist provider of financial education and guidance in the workplace, says: “Many workplaces now offer support to their employees in terms of financial education, guidance and advice, so it is worth speaking to employers to find out what help is available.”
To help with the transition towards retirement, WEALTH at Work shares the following 10 tips.
Pensions are not the only source of income in retirement
When it comes to retirement, there are many assets, such as Isas, shares and savings, which can be used as sources of income in addition to your pensions. It is beneficial to work out which assets you have, what they are all worth, and the best way to use them to make sure you are not paying unnecessary tax.
Consider how much you may need in retirement
Don’t presume the figure is the same as your salary. It may be possible to have the same disposable income in retirement as when you were working, even if your pension income is less than half your salary, once lower income tax, paid-off loans and independent children are taken into account.
Think about how to access your pension income
If you have a DC pension, there are different ways to access your savings. This could be through income drawdown, buying an annuity (a regular retirement income), taking it as a cash lump sum, or a combination of these options. Speak to your employer about any support that they provide, such as financial education and/or access to regulated financial advice. You can also receive free and impartial guidance from Pension Wise (pensionwise.gov.uk).
It is important to not only check fees, but make sure any retirement product suits your needs.
Don’t pay unnecessary tax
Generally, the first 25 per cent of a DC pension is tax-free and the remaining 75 per cent is taxed as earned income. But some people may find themselves paying more tax than they need to. For example, some people may have taken their pension as a cash lump sum, not realising that it made them a higher rate taxpayer. You may be better off taking a smaller amount each year from your pension and topping it up with withdrawals from your Isa.
Can you really afford to retire right now?
Do you have enough put aside to be able to afford to retire, or do you need to work a little longer, or perhaps part-time? Research suggests many people live longer than they expect they will – as much as 30 years beyond state pension age. So keep this in mind when doing your sums.
Make sure your pension beneficiary details are up to date
Ensure everything is in order as you would wish it to be.
Regulated financial advice can be an investment
An adviser will look at all of your assets, work out the most tax efficient way for you to fund your retirement and then put a bespoke plan in place for you.
Protect yourself from scams
Beware website and marketing scammers. The Financial Conduct Authority’s ScamSmart website includes a “warning list” of companies at fca.org.uk/scamsmart. You can also check whether a company is registered with the FCA.
Finally, choose what is right for you
Make sure you fully understand all of your options so you are able to make informed decisions that best suit your lifestyle choices and needs.