- Pensions FAQs: your pensions questions answered
Pensions FAQs: your pensions questions answered
There’s no set figure as it changes from person to person. A good exercise is to work out what income you will need in retirement by adding up what your day-to-day expenditure is likely to be at that time, plus how much you will need for financial aspirations such as travel. Then take a look at your existing pensions and savings and work out a rough estimate of how much you will receive. If there is a gap between the two, you need to save more, look at other ways to close the gap between the two, or review your goals in retirement.
It’s not surprising with people moving jobs much more frequently than at any time in the past. The good news is it’s easy to trace old pensions with the Government Tracing Service. It has a record of UK workplace pension schemes, and they can give you the details so you can contact the pension provider directly. Visit www.gov.uk/find-lost-pension or call 0845 6002 537.
Investment risk is a measure of the potential for growth you have in your investments – and the potential to lose money. More risky investments include stocks/shares, which offer a higher potential to make money, although they have an increased potential to go down in value. Other investments like cash and bonds are lower risk and may be more secure against falls in value, but normally offer lower returns.
How much investment risk you take depends on the type of investments your pension is in. Many pension schemes allow you to select some degree of ‘risk appetite’ that adjusts your investments accordingly. How much risk you take is up to you. Some people are more confident with higher levels of risk than others.
The Future Pension Centre can give you a state pensions statement showing how much you are likely to get. Go to www.gov.uk/future-pension-centre for more details.
When it comes to paying tax on your pension income remember this. If you choose to withdraw some or all of your pension fund as a lump sum, the first 25% will be tax-free, with income tax payable on the rest. Depending on the size of your pot and your tax status, parts of it may eligible for the higher rates of tax.
When you get to state pension age you won’t have to pay National Insurance contributions, but you may still have to pay income tax if your income - including private and/or occupational pensions, State Pension and income from other sources such as deposits (and certain investments) - is above your tax-free personal allowance (currently £10,000).
The best way to make sure loved ones are looked after is with a Will. A Will is a legal document that sets out what you would like to happen once you are no longer around (such as inheritance wishes). In terms of pension arrangements, some annuities (called Dependent’s pensions) can also be payable to your partner or spouse should you die first. Talk to a financial adviser to see if these are suitable for you.
The best time to retire is when you feel ready, and when you have the funds to live the life you want.
Many people worry about swapping the comfort of a regular wage to a reliance on a pension fund. There are also other things to consider, such as the fact that employment provides a social side to life which you could miss when you are retired.
There are many positives to retired life. It’s a chance to do some things you’ve always wanted to but not had the chance due to work commitments. Maybe you’d like to travel, take up a new hobby, or simply relax and spend time with family and loved ones.
No, you can arrange your pension income in a few different ways. Taking an annuity – either from your pension provider or from an alternative provider – will guarantee an income for life. But it is just one way - other options include drawdown. Drawdown also gives you the option to arrange an annuity or lump sum at a later date. You could also take some of the fund to buy an annuity and leave the rest in the income drawdown fund. It might be worth talking to a financial adviser about this.
As a first step, make sure you have worked out all monthly outgoings, plus costs that may occur once or twice a year, and then add on what you are likely to spend in retirement, such as hobbies, travel, and paying for children/grandchildren. Then you will be able to see how much pension income you will need to enjoy the retirement you want. Then work out how much you are likely to receive when you retire, including when you are likely to receive your state pension. This could be from Workplace pensions, Personal Pension Plans, savings and investments, property or any other income.
If there is a gap between the two figures, you will need to reassess the quality of life you expect in retirement, or look to take steps to bridge the gap. The good news is that by knowing, you can start to plan accordingly and do something about it.
You may have to adjust your expectations as to what you want to achieve or when you’d like to retire, but there are steps you can take even if you are five or 10 years away from your expected retirement date. As with all financial plans, it may be a good idea to speak to a financial adviser.
One of the key mistakes people often make is to take the annuity being offered by their pension provider rather than to shop around. The biggest issues with purchasing an annuity are the lack of transparency over the different rates available from different providers, as well as the different types of annuities available. It’s important to talk to a financial adviser before deciding how to arrange your retirement income as purchasing an annuity is usually an irreversible, one-off decision that will have a big impact on the rest of your life.
Volunteering in retirement is becoming very popular as it is a good way of meeting people, helping keep active in retirement and maintaining a social life. One in five (2.2 million) over 60s are involved with at least two different charities according to research by the Royal Voluntary Service. A great resource for volunteering in retirement is: ageuk.org.uk