If you’re coming up to the age of 55, it’s about time to start thinking about what you want to do with the money from your pension pot.
But should you delay your pension or take it right away? If you take it, what’s the best way?
Assessing your options gets overwhelming and confusing for everyone. You’ll make decisions that – quite literally – affect the rest of your life. Here’s how to start making plans for your retirement (without getting stressed about it).
- Talk to your pension provider
- Use Pension Wise
- Think about taking a lump sum
- Check your State Pension
- Get independent advice
- Consider a phased retirement
- Look at income-bearing investments
- Get more advice (and be careful)
Nobody likes this bit, but it’s really important to kick-start your retirement planning.
Contact your pension provider(s) and talk to them about annuities. Ask for a statement of what your annuity options would be if you purchased one – and what other options are available to you.
You might want to put this off but your pension provider is going to contact you 6 months before you retire (or you can take your pension) anyway. Grab the nettle and have a good chat with them!
Track your full pension pot with lost pensions
Talk to all of them – including your forgotten workplace pensions (use the Government’s Pension Tracker to find them), your small pots, and your main pension.
When you’ve got your annuity statement and options on the table, start shopping around. You no longer have to buy an annuity – and you certainly don’t have to buy it from your current provider. Shopping around can net you up to 20% extra retirement income!
This is free so grab it!
People about to retire can have one session of free, independent advice on what to do with the money in their pension pot. It’s called Pension Wise and the help is given by local representatives of The Pensions Advisory Service, Citizens Advice and other free advisory services.
Visit the Pension Wise website here or call them on 0800 138 3944 to book your free appointment.
This is just a springboard session. You won’t get a ton of detailed advice for free – but it’s a great place to start. It’s like a compass reading for your plans: you’ll have an idea of where to go, but the route won’t get mapped out.
For that, you need to speak to an independent financial adviser who specialises in pensions and retirement planning (see Step 5).
You’re allowed to take the whole lot of your pension pot in one lump sum out…but after the first 25% it will be taxed.
It will be taxed as income in the year that you take it.
This can increase the amount of tax you pay.
Decide what to do with your pension pot lump sum
Also, you will need to decide what you’re going to do with that money in order to keep yourself going through what we expect to be your long and happy retirement!
Will you put it into a mix of savings accounts, gilts, income-bearing shares, property or other products like that (see Step 7)?
Or would you actually prefer to put all or some of it into an annuity for a guaranteed regular income?
All these are questions you need to ask yourself and (see Step 5) a proper, independent adviser.
…and consider putting it off for a few years.
You can get a State Pension forecast – i.e. find out how much you will get from the State pension – any time by going to gov.uk/state-pension-statement. You can also speak to the State Pension Service on 0800 731 7898.
In fact, the earlier you check, the more you can do. It’s possible that you haven’t paid enough National Insurance contributions to qualify for the full amount, so if that’s the case you can ask to ‘buy’ up to six-years-worth now. Find out about how to do that here.
Also, seriously consider putting off the start date for receiving your State Pension. You could get more money by doing so. Your State Pension payment increases by 1% every 9 weeks you defer – so about 5.8% for every year.
This means you’ll get more each month when you do claim – leaving you breathing space to use your workplace or private pension pot in other ways.
The Pension Wise advice is certainly useful to have and I recommend that you do a bit of reading and thinking of your own about your pension options, what you want to do in your retirement and how you want to provide for family members.
But it’s also useful at this stage to pay for financial advice that will help you maximise your cash and remind you of services you may need later on that you should set aside cash for.
This will cost you money – around £500 for some – but could save you THOUSANDS of pounds and stop you from making costly mistakes.
Talking to your pension providers is useful to start with – but they’re bound to recommend their own products. An independent adviser is legally bound to suggest the best route for your personal circumstances. They’re not tied to any particular provider – so you know that they make their recommendations with your best interests in mind. If you want to make sure your financial adviser is registered and regulated, check the Financial Conduct Authority register before you agree to an appointment.
Once you have looked at how much you will get from your State Pension and how much you will get from your investments (based on your financial adviser’s recommendations) you might decide that you need more cash to live on.
Time to think about:
1. Putting off retirement further and earning more, if you can stay in your current job or keep going with your self-employment
2. Going to a part-time position rather than keeping on working full-time
3. Retiring from your current post but picking up money-earners to supplement your income in retirement.
Reducing your hours
Working part-time also means you can phase into retirement – and claim the State Pension while you’re still working to bridge the gap between full-time work and retirement.
When you reach State Pension age, you won’t pay further National Insurance on your monthly pay cheque. You can use this cash to save and invest as part of your pension pot.
Also, you can keep paying into your workplace pension as long as you’re employed (and still eligible – i.e., you earn enough to qualify). This means you – and your employer – can continue to make contributions to your pension pot for as long as you keep working.
Making extra money
You can also look at ways to supplement your income. From selling your crafts to being a mystery shopper, the options are almost limitless.
As you know, we’re BRILLIANT at coming up with money-makers on the side.
In fact, we have a whole article on money-makers for the over-60s (which are fine for the over-50s too). Check out our article on ways to save for over-50s who are broke as well.
There are loads of money-makers that are fun, too, that get you out and about meeting people as well as bringing in some extra money.
The big question you need proper answers to is what you should do with the tax-free lump sum from your pension pot (if you choose to take it).
The BIG thing you have to do is to be very wary of cold callers, ads in the papers or on the radio and TV and anything that doesn’t come from an independent advisor, offering you ‘fantastic returns’ on your pension money. There are a LOT of sharks circling new retirees and they want to steal your money. Don’t let them!
So, bearing in mind that lots of people want to take your money from you, take your time in deciding what you want to do with it to bring yourself a good income through retirement (given that it could be 20, 30 or even 40 years plus!)
Unless you decide to go the traditional route and just put it all in an annuity (make sure you shop around for the best one if you do this), then it’s always best to put your cash into a mix of investments. These could include two or more of the following:
- Pensioner bonds (safe and reasonable return)
- General savings accounts in banks and building societies (safe but pathetic returns)
- Gilts (safe and fairly dull returns)
- Peer-to-peer lending (riskier but better returns – be careful which company you go with though)
- Bond funds (medium to high-risk and returns are medium to high risk)
- Shares with good dividends (riskier but generally much better returns)
- Property (medium to risky and can involve extra work – returns depend on where you are buying and what you are buying)
- Annuity – you could put a small amount of your pot into an annuity as it is totally safe, though the returns can diminish over time with inflation. Or you could consider an annuity when you’re over-80.
- Small business – putting some money into your own or a friend’s small business is a very risky one. If you go for this make sure you put no more in than you can afford to lose.
If any of these sound interesting to you – but you’re not sure how to invest in them – don’t panic! We’ve got tons of articles to get you started. Check out these sections:
Moving your money for your retirement is a very important decision to make so if you’re still not sure – or you’ve been offered something that sounds fabulous and you don’t know what to do – go and pay for more advice.
It’s worth it!
Remember: you can always pose your question to Jasmine in the comments below!
*This is not financial or investment advice. Remember to do your own research and speak to a professional advisor before parting with any money.