Those who are approaching retirement and have a defined contribution (DC) pension, now have a lot of decisions to make thanks to the pension changes that came into force in April 2015.
WEALTH at work has created its ‘Top tips for those planning to retire in 2017’.
- Understand the options – The pension changes meant that people now have greater flexibility and freedom over how they access their DC pensions. This is great news, but with responsibility comes risk, so employees need to make sure that they take their time, fully understand all of their options and that they’re armed with all the facts.
- Collate information on ALL assets – Before your employees start to make any decisions based on their retirement plan, they need to gather up-to-date information on all of their pensions and savings, and what they are all worth. If they have ISAs, shares, deposit accounts, or any other assets, they should look at these as other potential forms of income in retirement.
- How much income do your employees need and want? – Your employees need to work out how much income they are going to need in retirement, including essential income to meet their day-to-day living expenses (including household bills), and discretionary income for holidays, hobbies etc. There is a budget planner available on the Money Advice Service website they can use.
- Can they afford to retire? – Do your employees have enough put by to be able to afford to retire, or do they need to work a little bit longer, or part time? Research has found that most people live longer than they expect they will, so they must keep this in mind when working this out.
- Income drawdown, annuity, or a combination? – Income drawdown is no longer the preserve of the wealthy, and really just means that individuals can choose how and when they access their pension, but they should ideally get advice when deciding.
- Will your employees pay unnecessary tax? – If they go down the income drawdown route, your employees need to make sure they don’t pay any unnecessary income tax. Usually 25% of their pension is tax free, and the remaining 75% is taxed as earned income. Employees should look at their options, for example, they may be better off taking a smaller amount each year from their pension and top it up with savings from their ISA to use for income, as this is paid tax free.
- Employees should make sure their pension beneficiary details are up to date – In 2015, the Chancellor abolished tax on death on DC pensions for anyone who dies before the age of 75. This means that any remaining pension can pass onto their beneficiaries tax free, subject to them not exceeding the lifetime allowance limit, and providing the company pays out within two years of date of death.
- Advice can be cheaper than no advice and provide added consumer protection – Many people are concerned about the cost of advice without realising that when they buy retirement products such as annuities, through for example online brokers, they are paying commission that can cost just as much, if not more, than getting advice. A financial adviser should look at all assets, work out the most tax efficient way for individuals to fund their retirement income, and put the plan into place for them; then individuals have the benefit of consumer protection for the advice given.
- If employees are eligible, they could consider buying extra state pension – Women born before 6 April 1953 and men before 6 April 1951 have an opportunity to top-up their state pension by up to £25 per week. Details can be found at: gov.uk/state-pension-topup
- Scams don’t look like scams – Scams look and sound legitimate, which is why people are hoodwinked. They often have very professional looking websites and literature. Whatever your employees are planning to do with their retirement savings, they should check before they do anything that the company is registered with the Financial Conduct Authority (FCA).
Jonathan Watts-Lay, Director, WEALTH at work, said: “The freedoms people now have with their pensions is a good thing, but it can be incredibly daunting. In the past many people automatically bought annuities from their pension provider, even though there may have been better rates available elsewhere, so employees need to make sure they look into all their options. If they were daunted before, how must they be feeling now with even more choices available?”
He added: “We provide a complete service offering to help ensure employees are informed on the pension flexibilities and can take appropriate action. This includes: financial education – helping them to understand the pros and cons of each retirement income option; regulated advice to provide individual support; and we can also help with the implementation of their chosen option in a tax-efficient way – whether employees decide to buy an annuity, go into drawdown or simply make cash withdrawals.”