MoneyMagpie

Jul 23

How to decide what to do with your pension pot

You’re over 55 (or about to be) and you know you can take out the money from your pension pot.

But should you do it?

If ‘yes’, should you do it all in one go or spread it over a few years?

If you take it out, what should you do with it next?

It’s a worry and all the changes announced by the government only make it even more confusing!

Here’s our step-by-step guide to working out what to do with your lovely pot of pension cash.

 

Step 1. Talk to your current pension company (or companies)

Horrible thought I know, but at some point you need to grab the nettle (or nettles) and find out how much you have in your pot(s) and how much you would get from it if you took an annuity.

In fact your pension company should contact you six months before you retire anyway and then again six weeks before. Nothing to stop you contacting them even earlier, though, to give you more time to work things out.

If you’re in a workplace pension, or have had a few of them (more likely), get in touch with the pension trustee of each one and find out how much you will get.

 

Step 2. Use Pension Wise

pension wiseThis 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 will be given by local representatives of The Pensions Advisory Service, Citizens Advice and other free advisory services.

No one knows how good it will be and, frankly, one session is unlikely to be enough for you. You will probably need proper, paid advice on top of this session to really give you the help you need.

 

Step 3. Think about taking out a lump sum

For a while, we’ve been allowed to take 25% of the pension pot(s) out as a tax-free cash lump sum.

But now (as of April 2015) we’re allowed to take the whole lot out…but after the first 25% it will bpension pote taxed.

It will be taxed as income in the year that you take it.

This can increase the amount of tax you pay.

Also you will need to decide what you’re going to do with that money in order to keep yourself going through what I 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 as it used to have to be?

All these are questions you need to ask yourself and (see Step 5) a proper, independent advisor.

 

Step 4. Find out how much State pension you will get

pension pot…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. You could get a few hundred more each year or claim a lump sum by putting it off by one or two years. It’s worth considering. Find out more about this on the Gov.uk site here.

 

Step 5. Get paid-for, independent advice

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.

You will probably have to pay around £500 for this sort of advice but it’s worth it as it could save you/make you thousands.

 

Step 6. Consider working part-time instead of full retirement

pension potOnce you have looked at how much you will get from your State pension and how much you will get from your investments (using the financial adviser to give you ideas of how to get the best income from your investments) 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.

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. Take a look at the list of fun money-makers here.

 

Step 7. Look at income-bearing investments.

The big question you need proper answers to if you take out a lump sum is what to put it into in order to give yourself a really good annual income.

Jasmine says...

Quote 1

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!

Quote 2

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!)

pension potUnless 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 I suggest you 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 and 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 so if you go for this make sure you put no more in than you can afford to lose.

 

Step 8. Get advice again and be very careful

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!

Or…ask me your question in the comments below. I’ll get you the answers as quickly as possible.

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WHAT DO YOU THINK?

13 thoughts on How to decide what to do with your pension pot

  1. Thanks for that Jasmine, as usual your comments have been most helpful keep up the good work.
    much appreciated.
    Rodger




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  2. I have one year to go to get 30 years in my company’s final salary pension. What difference would it make to my pension if I was laid off 6 months short of the 30 years, there are talks of lay offs, as a rule of thumb we get to retire on half pay if you reach this target.




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    1. The nice people at Hargreaves Lansdown answered this question for me. It’s a little bit complex but they have done a good job of explaining I think:

      ‘It sounds like you are still accruing benefits in a final salary pension. Unfortunately, this means there is no simple answer, but broadly the pension should work like this:

      If you have 29 years’ service in the scheme, your pension entitlement might be 29/60ths of your final salary. If you have been a member of the scheme for 30 years, your entitlement might be 30/60ths of your final salary.

      An example makes this easier to explain.

      Assume your salary is £30,000, 29 years of service might give you a pension of £14,500 per year, as opposed to 30 years which might entitle you to £15,000.

      This extra £500 of annual income, increasing in line with inflation is worth around £15,000 at age 65.

      The key is to understand the definition the scheme use for ‘final salary’ and how the scheme credits your years of service. These type of schemes are notoriously complex, so whilst your pension could be defined by your final salary in your last year of work, it could also be a different definition, like your average salary over the past 3 years. You must make sure that you ask your employer to set out the differences so you fully understand the implications.’




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  3. Seeing that you have to have 35 years full national insurance stamps to get a full pension. I keep hearing rumours that the goverment might look at some people and say you have a private pension you don’t need a state pension and take it off them, to fund short falls elsewhere surely they could not do this ?




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    1. It’s quite likely that this sort of thing is being discussed behind closed doors at the House of Commons, but it’s unlikely to happen, at least in the short to meedium term.

      Anything that is ‘means tested’ (i.e. what you have outlined here) involves a lot of work and expense on the part of the State. It takes a lot of man hours and technology to work out if someone earns below or above a particular threshold. So that’s one thing that could hold them back from doing it.

      When I interviewed the Pensions Minister, Richard Harrington, he mentioned that one thing they had learned from the WAASPI campaign was that any changes to the State Pension needed to have at least 10 years’ notice, so that’s something you can be sure of.

      Also, do remember that this Government – and probably later Governments – are not keen on doing anything that will anger pensioners because it’s pensioners that tend to vote. It’s a sad fact but that’s the way most Governments think! It’s more likely – as we are currently seeing – that they will take money from the young than from the old.

      As to whether they would be allowed do it, I think it’s certainly possible for them to do it, just not that likely.

      It’s worth taking a look at this useful article by Frances Coppola http://www.coppolacomment.com/2016/10/state-pensions-property-right-or-benefit.html on the subject of whether the State Pension is a Right or a Benefit. Essentially it’s a Benefit and, as such, can potentially be removed in a worst case scenario. The country would have to be in a pretty parlous state for them to do that but it’s not beyond the bounds of possibility. The pension bill is by far the biggest of all the State benefits (about £90 billion a year) and is a constant headache to the Treasury.




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  4. Thanks for the good advice Jasmine could I please ask you to remove my name from the section.
    I would prefer to be anonymous . I will then enter into more conversation.




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    1. Certainly. I’ve taken your surname off the comments. Is that enough?

      I’m sure you have signed up somewhere but I can’t find where that is. I was going to try to take your surname off at the source, but I’m not sure where that is!




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  5. Hi jasmine I have 28years in a final salary I want to work for at least 30years, my pot will be around £300000 then.
    I keep reading bad news regarding F/salary pensions in the paper, I don’t know what to do, and how can I trust an independent Financial Advisors, who has possibly only been inn the business a few short months.




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    1. Well K I think you can congratulate yourself on having a final salary pension. Yes, many of them have problems and most are now closed to new workers because they cost so much to run that companies realise they can’t keep them going. However, on the whole, for workers who have these final salaries, it’s a good deal. You’re pretty much guaranteed a certain income for your retirement. And don’t forget that the State Pension, which you will also get, is pretty decent too now (about £9,000 a year I think). So you’re in a much better position than many people about to retire.

      When it comes to financial advisors, there are many of them that have been going for years and years, so there’s nothing to stop you picking someone who has, say 20 years experience, over someone who’s just come into the business.

      Take a look at Vouchedfor.co.uk because that has financial advisors and how they’re rated by people who have used them. Remember that advisors give you a free session to start off with so there’s nothing to stop you going to see several of them, listening to what they say and a) deciding which one you think is the best and b) picking up free information and advice as you do it. If you find that a few of them say the same things it’s a fairly good indication that those pieces of advice are likely to be sound.

      But generally, I would say don’t worry as you are in a pretty good position. A pot of £300,000 will keep you going through retirement, particularly when it’s added to your State Pension. Also, if you wanted to you could do extra work here and there to top up your income. Well done getting to the place you’re in now!




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      1. i have 2 years to go before I hope to retire, I am putting £200 per month into an cash ISA, is it better to
        put into my pension at work via AVC,s.




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        1. hi Rodger

          I’ve had a word with Tom McPhail of Hargreaves Lansdown about this and he says the following: “The tax treatment is a big part of this and then there is the question of access to the money. If he pays money into an AVC he’ll get tax relief on his investment but he’ll probably then end up paying tax on the money when it comes back out again. This might be beneficial if he’s a higher rate taxpayer now but will only be a 20% taxpayer in retirement, as he’ll then make a tax gain on the transaction. By contrast if he’s only going to get 20% relief on the money going in and will pay 20% tax on the money coming out there’ll be no tax gain. Then there is the question of access to the money. With the ISA he gets no tax relief on the money going in but he can take it out again tax free at any time. Given his proximity to retirement, this looks it might be the simpler and more attractive arrangement. He does need to just think about his overall allowances and whether he’ll hit any limits, either in terms of his ISA saving or the pension Annual or Lifetime Allowance.
          As to where he invests the money, if he’s going to be pulling it out again fairly immediately then I’d suggest holding it in cash whereas if this is a long term investment form which he’ll be drawing an income for perhaps decades to come, then an equity fund may be the better answer, provided he can tolerate fluctuations in his fund values.”

          Hope that helps




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