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Retirement planning with Tracey O’Reilly-Johnston.
What is the current retirement age and what age can you take your pension?
Currently in the UK the retirement age for your state pension is 66, for both men and women. This will start to gradually increase from 6 May 2026.
That seems a long way off, but it will come around quickly. You may have heard about these changes in the press and in recent years the state pension has changed linked to when you were born. So it can be tricky to know when you can actually retire.
For those of us born after 6 April 1960, our state pension age will rise to age 67. Those born after 6 April 1978 won’t be able to access the state pension until age 68. The government is going to keep the state pension age on review, so it could change again in the future. The government does this based on different factors such as life expectancy.
Most of us now have a personal pension or a workplace pension, and there are different rules as to when we can access these arrangements. For the majority of private and personal pension schemes, we can usually access these from age 55. This is increasing to age 57 from 6 April 2028.
There are certain circumstances under which you could access your personal pension earlier than age 55 or 57. These include if you’re suffering from ill health, for example, or your scheme has a protected pension age. Your financial adviser can explain this in more detail.
The government likes to keep an eye on private pension arrangements, with a population that’s living much longer. On average we’re living well into our late 80s which is great for us, but due to that there’s speculation that pension ages could increase again, potentially to age 58.
Watch this space, because it’s quite likely that the government will bring the minimum age for personal and private pensions to 10 years before your state pension.
Why do I need to plan for retirement?
While we are working, our employer pays us an agreed salary or wage per week or per month. We use this money to cover our essential living costs and any other expenses. But when we retire from work, we will no longer be receiving that fixed amount – yet we still need to live and cover our monthly expenses.
People in retirement normally use pension monies or savings to replace their lost employment income. Some people don’t want to wait until the state pension age to retire.
For most of us, the state pension won’t be enough to replace what you’re losing in employment income. In the UK at the moment the annual state pension is around £10,000.
So we should try to set some money aside each month while we are still working to save towards our retirement. A lot of the clients we speak to on retirement planning want to retire on a similar level of income. They have plans to see the world and do things they couldn’t while working or caring for children. In retirement you might be thinking about taking more weekend breaks, for example.
Most clients want to maintain the lifestyle they’re accustomed to. We hope that by the time we come to retire that our outgoings will be a lot less. Many of us will have cleared our mortgages and hopefully be debt free. But at the same time, a lot of clients will want to change or upgrade their car every few years for example. You’re retiring from work but not from life.
How do I plan for retirement? What is the process?
No matter how young you are and how far off on the horizon age 55 or age 57 may seem, it will happen. Don’t leave planning for it until the last few years before you would like to retire.
Planning for your retirement should be an essential part of your working life. The earlier you start, the easier and the more effective it’s going to be. The government introduced auto enrollment so that everyone gets a workplace pension with contributions from your employer. So it’s never been easier to save for retirement.
At the moment, if you pay 5% of your salary into your workplace pension your employer will pay in a further 3%. Some employers offer more than this as part of your benefits package. Plus, you could choose to pay in more if you wish.
There’s a cap on the amount that you receive tax relief on, which was until recently £40,000 per tax year. It was increased in the Spring 2023 budget to £60,000 per year.
Auto enrollment was revolutionary. Historically, only certain professions offered a company pension – that was definitely the case when I entered the world of employment. There are also incentives to encourage us to save for our own retirement, which is why the government gives you tax relief on any contributions to your pension at your marginal rate of tax.
So if you’re a basic rate taxpayer this will be an additional 20%. As an example, every £100 that you save into your pension will be boosted by £25 tax relief, so that £125 goes into your pension. Pensions are usually invested funds, so they should grow tax free. That’s another break for pension savers, so why wouldn’t you take advantage of it?
How do I claim my pension and when should I do it?
Speak to your financial advisor – we can help you understand how to take your pension benefits and help you navigate any potential pitfalls.
There are different types of pensions out there. Some people, especially those who work for public sector bodies, may have a final salary or defined benefits pension. This is going to pay you an annual pension income which is a set amount for your lifetime. It is based on your length of service.
Others among us will have personal pensions, sometimes referred to as money purchase arrangements or defined contribution pensions. Under the pension freedoms legislation introduced in 2015, we now have greater control and flexibility over how we access our pensions when we retire.
Unlike the defined benefit or final salary schemes, these don’t provide an income guaranteed for life, so it’s here that an advisor is invaluable. We can advise and guide on how much to take from your pension to ensure it’s going to last you throughout retirement.
This type of arrangement is essentially a pot of money, so the earlier you plan for it the easier it will be to save enough money into the pot. A lot of clients don’t really understand how their pensions are going to be paid to them, by whom, and how it will be taxed. The fact that pension income is taxed at all can be a bit of a shock to people.
We’re here to help you transition from employment income to pension Income. The good news is that It’s more straightforward and, in most cases, it’s more tax efficient.
What if I’ve lost track of previous pensions?
We can also trace old pensions that you may have. Historically, people didn’t move employers much and workers often racked up years of service with the same organisation. The workplace has changed a great deal, and many of us today will have a few pension plans from previous employers.
It can be quite hard to keep track of them all. Most pension providers will write to you on an annual basis with a pension statement. You might not understand these and just file them away. Perhaps you have moved house and are no longer getting that annual statement.
The government is trying to help everybody keep track of their pensions and created the pension tracing service, which is free to use. All you need is the name of your employer to find the pension provider and track down an old scheme.
How can I clear debts before I retire?
Many of us don’t want to be in debt when we’re considering retiring. We often find that within a few years of making their last mortgage payments, many clients are making moves towards retirement.
They might be working fewer hours as they approach full retirement. It’s a very personal choice, but I don’t know many people that would consider retirement if they were still paying off a large mortgage or large debts.
If you are still paying off debt at this time, definitely speak to your financial advisor. We can guide you on which debts to clear first. Perhaps you could redirect monies from elsewhere to clear the debt faster. Being debt free on retirement or in the years approaching it will give you greater peace of mind and a happier retirement.
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How can I boost my pension pot?
There are definitely ways in which you can boost your pension savings. I mentioned earlier that the government gives you tax relief at your marginal rate on your pension contributions, whether they’re made by you or your employer.
For a basic rate taxpayer that’s 20%. It’s 40% for a higher rate taxpayer and 45% if you’re an additional rate taxpayer. There are some limitations and restrictions. But for most of us, earning under £260,000 a year, we can claim tax relief on contributions up to £60,000 a year.
Your pension savings are growing, tax free. There’s no capital gains tax or income tax applied to any growth on your pension investments. That definitely can help boost your pension savings.
You can also use a salary sacrifice arrangement to boost the amount that’s paid into your pension, and in most cases, your net pay isn’t really reduced at all. Employers are more than happy to use this arrangement as it offers savings for them as well. It’s definitely worth a chat with your financial advisor around whether salary sacrifice would be suitable for you.
An obvious way to boost your pension savings is to pay in more when you can afford to – if you receive a pay rise, for example. It’s also possible to pay in a lump sum. For example, if you had a bit of cash you’d built up in your deposit account that you didn’t have a specific need for, you could put it to good use by adding it to your pension pot.
Are there any products that can help with pension planning?
Paying money into your pension from a younger age will give your pension money more time to grow. You can actually open a pension for your children – a junior pension. I’ve had a few clients who have opened pension accounts for their grandchildren – because you’re never too young to start saving for your retirement.
If you’re lucky enough to have used your full pension allowance, you could also use your ISA allowance or your Lifetime ISA to save alongside your pension. Like your pension, your ISA monies grow free of any capital gains tax or income tax.
And in fact, when you come to take your pension income in retirement, using your ISA alongside it can really help you mitigate tax. Again, this is an area where a really good advisor will prove their worth to you.
Where your pension is invested can have a huge impact on what you’ll get back when you retire. If your scheme has a default investment option when you join the scheme, for example, it may not be the most suitable for you. So look at what your money is invested in and speak to your financial advisor if you have any questions.
What else do we need to know about retirement planning?
We as advisors have a critical role to play when it comes to retirement planning and the sooner we are involved in these conversations the better. We can help and guide you with the selection of the scheme itself, the investments you hold within it, and how you make your contributions – whether it’s via salary sacrifice arrangement or a straightforward member contribution.
We also ensure you’re doing things in the most tax efficient way, both in saving for your retirement and when you start taking your pension as an income. We can help you make one-off, lump sum contributions into your pension. We keep track of your pension arrangements and even monitor performance along the way.
It may be that you need to merge your pension arrangements to make it easier to take your pension benefits at retirement. This isn’t always possible for some schemes, and in some cases it’s not in your best interests. But these are the conversations and investigations to have with your financial advisor.
It’s our job to build a long-term plan with you and prioritise building your pension pot steadily over the long term, rather than chasing quick wins. We focus on your goals in retirement and the drawdown of your pension benefits over multiple decades – even potentially passing them on to the next generation.
And, as financial advisors, we are required to keep up with changes to pension legislation and even tax legislation. The ultimate goal is to keep you on the right track for a long and happy retirement.
The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.