4 things retirees wish they had done differently with their pension

Research reported by Professional Adviser has found that 32% of UK retirees admitted that they would make different financial decisions about their retirement pots if they had the chance to start the process again.

Researchers surveyed more than 500 Brits aged 55 and over who were either fully or semi-retired. They asked a series of questions designed to shed light on the central issues affecting retirees. The answers revealed that one of the biggest issues was the financial decisions they had to make.

Read on to learn what retirees would do differently with their finances and pension if they could go back in time and redo their retirement.  

1.       Make sure they had greater guarantees on their income

Of the people surveyed, 30% said that they wish they had a more predictable or guaranteed income.

Understanding how much income you will need in retirement is vital for planning effectively. This is especially the case if your pension will provide your income. Some or all of your pension is likely to be invested in the stock market and so may be exposed to risk, meaning the total value of your savings could fall as well as increase.

If you would like to secure a guaranteed annual income for retirement, it could be beneficial to look into annuities when you reach retirement age. An annuity can provide a guaranteed annual income, either for the rest of your life or for the term of the annuity, that you buy using a lump sum from your pension. 

Some annuities are inflation-linked, meaning the annual income you receive will rise in line with inflation each year. This could give you peace of mind that your annual income wouldn’t change even during periods of market volatility.

You can buy additional annuities later in life too, if you want to boost the annual income you receive.

2.       Explore more options for tax efficiency

The tax rules that relate to pensions can be extremely complex, and as such it’s important to be aware of the restrictions and thresholds before you withdraw from your pension. In the survey, 20% of the respondents wished that they had explored their options for improving the tax efficiency of their pension withdrawals.

When considering your potential tax liabilities, there are three areas in particular that could affect you.

Lifetime Allowance

Your Lifetime Allowance (LTA) is the maximum amount that you can grow your total pension pot to without incurring an additional tax charge. It currently stands at £1,073,100 for defined contribution (DC) pensions. If your pot exceeds this amount, you may face an additional tax charge depending on how you withdraw the funds.

The excess amount in your pension pot (only the amount that exceeds your LTA) will be taxed at 55% if you withdraw it as a lump sum or 25% if you take it through another method such as drawdown.

The extra tax that you owe will be taken from your pension pot before you withdraw the money, and you will need to declare this on your self-assessment form.

25% tax-free lump sum

When you withdraw a lump sum from your pension, 25% can usually be taken tax-free. Any further withdrawals are taxable at your marginal rate of tax alongside any other income you may receive in that tax year.

This means that taking a lump sum from your pension could potentially push you into a higher tax bracket, causing you to pay a higher rate of tax. It means you could lose 40% or 45% of your pension withdrawal to tax.

Remember that you have a Personal Allowance each year of £12,570, meaning that you may only need to pay tax on any income that exceeds this threshold.

When deciding how much to take from your pension pot, and how often you take it, keeping this in mind could help you to spread your pension withdrawals over a longer period of time to potentially reduce the amount of tax you must pay on your pension withdrawals.

Inheritance Tax and pensions

The tax implications of your pension after you die will usually depend on how old you are when you pass away.

If you are under 75 when you pass away, your beneficiaries are unlikely to need to pay tax on your pension when they inherit it from you.

Pensions are usually considered to be outside of your estate, so your beneficiaries may not need to pay Inheritance Tax (IHT) on any pensions that you leave behind, even if you are over the age of 75. They may need to pay Income Tax on any income they receive from that pension after they have inherited it, though.

If your estate exceeds the threshold for IHT, your beneficiaries are likely to be liable for IHT. The current threshold for IHT is £325,000, or £500,000 if you plan to leave your home to a child or grandchild.

As things like ISAs and other savings form part of your estate for IHT purposes, it can sometimes be prudent to draw your income from these sources before you turn to your pension.

3.       Take a smaller cash lump sum from their savings to begin with

A significant number of respondents – 20% – would take a smaller cash lump sum from their savings at the start of their retirement. There are several reasons this could be beneficial.

Firstly, leaving more of your pension invested means it has more opportunities to grow, although it does also mean exposing your savings to risk, depending on how your portfolio is balanced.

As discussed above, taking larger lump sums from your pension can also increase your tax liability.

Thinking realistically about how much of a lump sum you need to take initially and only taking what you need could mean that you are better off in the long run for these reasons. Your financial planner will be able to help you to understand how much you are likely to need using cashflow forecasting.   

4.       Look for more flexibility in their retirement income

In the survey, 19% of the retirees said that they wish that they had given themselves a bit more flexibility in their retirement income. Luckily, since the introduction of Pension Freedoms in 2015, there is now a variety of different options to choose from for accessing your DC pension.

Drawdown allows you to withdraw a lump sum from your pension as and when you need to. As mentioned above, you can withdraw 25% of your pension pot tax-free. This could be a good option if you don’t think you will need a guaranteed annual income and are happy to withdraw from your savings at intervals instead.

When you use drawdown, you can leave the rest of your pension pot invested, giving it more opportunities to continue to grow. However, since this exposes your savings to risk, there is a chance that the total value could go down as well as up. Your financial planner will be able to help you to decide what level of risk is most appropriate for you.

Using drawdown, however, does not need to rule out the possibility of a guaranteed income. You could use a lump sum from your pension to purchase an annuity and take a sporadic income from the remainder of your pension pot using drawdown.

By buying an annuity, you can have peace of mind that you will have a guaranteed annual income regardless of what might happen in the future.

Get in touch

Consulting a financial planner is one way that you can ensure you take the most suitable actions for you when accessing your pension. If you’d like to speak to someone about this, we can help. Email theteam@fortitudefp.co.uk or call us on 01327 354321.

Please note

A pension is a long-term investment. The fund value may fluctuate and can go down, 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 tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.