Five steps to secure your income in retirement

Deciding how to secure the income you need in retirement is one of the biggest decisions you will ever have to make. While recent changes to pension freedoms are, on the whole, for the better, they make accessing your pension more complicated and wrong decisions could have costly consequences.

The first step is to know the basics of tax and retirement. People estimate that living comfortably in retirement requires around 60% of the income they had while they were working. You can now take up to 25% of your pension pot tax-free, as a lump sum or gradually over time. Any additional money taken from your pension pot is added to any other income, eg paid work, taxable income from savings and your State Pension, and you are taxed on your total income.

Step two is to understand and compare your options. In broad terms you have four options for drawing your income. You don’t have to choose a single option – you can mix and match to suit your needs. The options are the following:

A. A guaranteed income for life: an annuity
You could be paid a set amount every month for the rest of your life, so you’ll know exactly how much you’re getting and when.

  •   Decide how much of your pension pot you want to use – you don’t have to use it all
  •   Take up to 25% tax-free
  •   Buy an annuity with the rest of the amount you have allocated to it and get a guaranteed income

B. Flexible access: flexible drawdown or partial encashment
Once you reach the age of 55, you can take out what you like when you like from your pension pot. The rest is left invested so it has the potential to grow.

  •     Take some money tax-free
  •     Leave the rest invested
  •     Take bits when you need it

C. Take it all in cash
You can take all your pension pot out in cash, however, you could end up with a lot of income tax to pay. Combine the value of your pension pots. Take up to 25% tax-free. Get the rest subject to tax.

D. Leave it for now
You can decide not to touch your money for now. This gives you time to think about your pension options and you can plan how best to use it to provide for your future. Your pot is left invested so it has the potential to grow.

Step three is to find out what your income could be. Find out how much each option could give you and how much tax you will pay when taking all or some of your money out. If you have enough information about your pensions, you can use one of the many online calculators to work this out, or ask an independent financial adviser.

It is important that you understand the features and constraints of your pension plan and what they could mean for you. The next step is to compare products and providers to make sure you get the best result and understand how much tax you’ll pay on any income or money you take.

Finally, choosing the right option is a big decision that will affect the rest of your life. You need to be confident that you are making the right choice.

For more information regarding pensions, inheritance tax planning or trusts and estate planning, contact a member the Private Clients team at PEM on 01223 728222 or visit pem.co.uk.

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