Ten questions to ask yourself about the new pension freedoms
1 – How long will my money have to last?
We now tend to live longer. An average 65 year old in good health is expected to live for another 24 years and one in four people could now live to see their 95th birthday. Our retirement savings are going to have to last us for a long time – perhaps 30 years or more. Leaving them where they are for longer could make a big difference to our lifestyle in old age.
2 – How much will my State Pension be?
Most people will be entitled to an old age pension provided by the State. The amount of this pension is not the same for everyone and will depend on your employment history and when you were born. Remember the State Pension is designed to cover only a very basic standard of living without any luxuries.
3 – What other savings do I have?
As well as savings in pension plans we may have other types of savings, for example bank saving accounts, premium bonds or ISAs. It may be better for you to take money from other savings first before drawing from your pension plan. If you own your home you might think about selling or renting it out to fund your retirement but remember you will still need somewhere to live!
4 – What are my future financial needs and how are they going to change?
Think about your living expenses, such as housing and family costs, and how these will change over the next 10, 20 and 30 years. Remember to budget for things like holidays and expenses such as car and house repairs. If you have debts then you may decide to use some of your retirement savings to pay them off, particularly if you are paying high rates of interest. Your financial needs are likely to reduce as you get older and become less active but then your ability to work also reduces. Bear in mind that in later years costs could increase as you may need to pay towards long term care for you or your spouse.
5 – How can I minimise my tax bill?
Most people enjoy a personal income tax allowance each tax year and this usually changes each year. You should think about taking your retirement savings in a way which makes the most use of your personal tax allowance so you don’t have to pay tax unnecessarily.
6 – Should I buy an annuity?
An annuity is a promise by an insurance company to pay you an income for the rest of your life. You pay the insurance company to give you the certainty of income each month or year – regardless of how long you live or investment performance. Some annuities provide for payments to be made to a surviving spouse or dependant after your death. You should check the terms of the annuity before you commit as they cannot usually be changed afterwards. It is worth shopping around different insurance companies before you buy as prices can vary.
7 – Am I being scammed?
Unfortunately there are some dodgy people around who would love to get their hands on your money and some people have already lost most of their retirement savings through scammers. Be very wary if someone is encouraging you to take your retirement savings or invest your money with them. If what they are offering you seems too good to be true, it almost certainly is!
8 – Will taking my retirement savings impact on my welfare benefits?
If you are receiving state benefits or Tax Credits then taking your retirement savings could impact on the level of those benefits. This is a complicated area and expected to change in the near future. Make sure you understand how your state benefits, tax credits or long term care needs would be affected before deciding to access your retirement benefits.
9 – What happens when I die?
If you die before you reach 75, any money left in your pension plan will be paid to your survivors free of any tax. If you die after 75, money paid to your survivors may be subject to tax depending on their circumstances. Retirement savings which remain in pension plans are not normally counted for inheritance tax purposes. If you buy an annuity then the benefits payable after your death will depend on the terms of the contract with the insurer.
10 – Where do I go to get more help?
Taking your retirement savings is a big decision and not one to be taken lightly. Make sure that you at least contact your pension plan provider for details about your options and read your plan booklet. After that, we would always recommend contacting an authorised, regulated, independent financial adviser, who will be able to help you to create a full and structured plan for your retirement.