1. WAIT Ignore anyone who offers help with liberating or investing your pension pot. Unless you have an urgent use or stupendous idea for how to use your pensions freedom right now – wait. Time costs a lot less than bad decisions. Everyone over 55 has the right to a 45 minute free consultation through PensionWise. Be wary there are plenty of organisations that will pretend they can give you the same free advice.
2. THINK TAX The tax man is banking on getting an extra £3 billion from people liberating their pension pots over the next few years. While we can get 25% tax-free it is not possible just to cash in the tax-free part. And even non-taxpayers can end up with big bills if they liberate relatively modest sums from their pensions. And even if little or no tax is due you will probably have it deducted and have to claim it back.
Someone with a £300k pension pot paying 20% tax would be likely to give HMRC around £90k if they cashed the whole lot in one go. And they then have to make the £210k last for the rest of their life. Typically 55 year olds live for 30+ years and they need to know their pension will last.
3. ASK QUESTIONS
- Not just about pension pots that can be liberated but other entitlements you may have?
- What other income do you have now and are likely to have when you stop work?
- What will you need to live while you are fit and should you become frail?
- What would you like to do while you are still fit enough?
4. ‘ANNUITY’ ISN’T ALWAYS A DIRTY WORD Okay, so annuity rates are rubbish at the moment and are unlikely to improve until interest rates begin to rise. The industry blames better life expectancy for lower rates but the latest statistics seem to indicate that lifestyle and poorer social care are putting this trend into reverse.
So, if you took the £300k pension pot mentioned earlier and put that into annuity it would pay around £15k a year from the age of 65 (assuming a healthy individual – impaired lives annuities pay better). There would be tax to pay on the any of the £15k income above the annual personal allowance. Someone who took the full tax-free lump sum could bank £75k and still have an annuity income of around £11.5k.
5. CONSIDER ALL THE OPTIONS There are lots of permutations, other options and new products, which still allow you to draw on you pension pot as and when the money is needed, allowing the pension pot to stay invested.
6. WATCH OUT FOR CHARGES Whatever you decide to do, the charges that can be exacted from your decisions are liable to become increasingly cunning.
7. DO YOUR RESEARCH ‘Nough said.
8. IMAGINE THE FUTURE – NOW! It’s human nature to enjoy spending today rather than saving for the future. One way to overcome this is to ‘frame’ decisions about your retirement in a way that links the decisions you make today to your future experience of spending and having fun.
If you enjoy driving a nice car, imagine how extra cash in retirement will allow you to get a better one or spend more on petrol. Imagine the envious glances of those waiting with their bus passes.
Or holidays may be your thing. Dull, boring figures about how saving more in your pension now will make you, say, £50 a month better off aged 65 may sound dull but over a year that amounts to a nice holiday somewhere warm. Picture yourself on the beach in the future rather than fretting about the extra deductions from you pay packet now.