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Dec 15

How to decide what to do with your pension pot

Reading Time: 6 mins

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).

 

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

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!

Step 2. Use Pension Wise

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).

Step 3. Think about taking out a lump sum from your pension pot

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.

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

…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.

 

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.

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.

 

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

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.

 

Step 7. Look at income-bearing investments for your pension pot

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).

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!)

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:

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!

Remember: you can always pose your question to Jasmine in the comments below!

WHAT DO YOU THINK?

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RODGER DU GOOD
RODGER DU GOOD
2 months ago

HI Jasmine
we lent our daughter a large some of money to get her on the property ladder a few months ago. Since then covid has arrived she has now lost her job. Obviously she now cannot go ahead and try to purchase, having this large some of money may stop her getting unemployment benefit, and help towards her rent, as she shares a house what would you advise in this situation.
Regards
Rodger

RODGER DU GOOD
RODGER DU GOOD
2 months ago
Reply to  RODGER DU GOOD

Any chance of some advice Jasmine

Joanne
Joanne
1 year ago

Useful ideas for using your pension.

Rodger Du Good
Rodger Du Good
2 years ago

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

Jasmine
Admin
2 years ago
Reply to  Rodger Du Good

Good stuff!

RODGER DU GOOD
RODGER DU GOOD
1 year ago
Reply to  Rodger Du Good

Hi jasmine
myself and my wife have recently finished work we have capital of around £80000 that we could put away somewhere safe for at least 2 years. we have 4 years to go till we reach pension age, what would you suggest as a safe haven for our hard earned money for at least that period of time.
regards

Rodger Du Good

Rodger du good
Rodger du good
2 years ago

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.

Jasmine
Admin
2 years ago
Reply to  Rodger du good

Hi Rodger. Sorry for the delay in replying. I’m trying to get an answer from the DWP on this. Will get back to you soon 🙂

Jasmine
Admin
2 years ago
Reply to  Rodger du good

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… Read more »

John
John
3 years ago

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 ?

Jasmine
Admin
3 years ago
Reply to  John

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… Read more »

K
K
3 years ago

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.

Jasmine
Admin
3 years ago
Reply to  K

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!

K
K
3 years ago

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.

Jasmine
Admin
3 years ago
Reply to  K

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… Read more »

Rodger
Rodger
3 years ago
Reply to  Jasmine

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.

Jasmine
Admin
3 years ago
Reply to  Rodger

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.… Read more »

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