Approaching retirement? How to get your pension in shape first

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Five options to consider to help boost your potential retirement income.

In the latter years of your career, you may well start to feel more than ready to retire and to start looking forward to living your dream retirement.

However, before you take the plunge, you need to make sure you’ve done all you can to get your pension and retirement income options in shape. After all, with increasing life expectancy, your pension might need to last for two or even three decades.

Below, therefore, we look at five ways to help boost your pension and increase your chances of having the sort of retirement you’ve always aspired to.

  1. Top up your pension savings

Your retirement may be fast approaching, but there should still be time to pay more money into your pension. This could be either by increasing your monthly contributions or by paying in a lump sum. These additions could still have a meaningful impact on the size of your pension pot.

Pension contributions benefit from 20% tax relief, providing an immediate boost to your savings. For every £80 you contribute to your pension, the government tops it up with a further £20. If you’re a higher-rate or additional-rate taxpayer, you get even more tax relief – 40% or 45% respectively.

If you do decide to top up your pension, it’s important make sure you stay within your pension annual allowance – that’s the maximum amount you can contribute to pensions each year without facing a tax charge. The annual allowance is £60,000, so for most people a top-up is achievable.

Bear in mind though that tax relief on personal contributions is limited to up to 100% of your relevant earnings in the tax year. So, if your earnings are lower than £60,000, you’ll only get tax relief up to the amount you earn.

You can continue to receive tax relief on your pension contributions up until age 75.

  1. Check where your money is invested

As people get older, their attitude to risk often changes, so in the run-up to retirement, it makes sense to ensure your pension pot is invested in a way that suits your future goals as well as your attitude to risk.

The consensus view is that as you get closer to retirement, you should move your investments into less risky assets – generally this means from equities into bonds, which have historically offered lower but more stable potential returns. The last thing you want is for a stock-market slump to reduce your savings just before you access them, as it’s very unlikely that you’ll have time to recoup any losses.

At the same time, your pension pot will still need to have the opportunity to keep growing, as you may need to fund what hopefully could be a very long retirement. Because of this, it makes sense to retain some exposure to shares. Whilst investments go down as well as up, history shows that shares have produced higher returns than bonds and cash over the long term.

Building a balanced pension portfolio by yourself isn’t always easy, which is why you should consider getting pension advice from a financial planner, who can help you construct a portfolio that matches both your goals and your attitude to risk.

  1. Consider consolidating your pensions

Most of us have worked for several companies during our careers, and so we have ended up with a range of pension pots. For many, consolidating your pensions into one pension pot can make sense, both from a cost and an administrative point of view. It could also potentially lower the amount of fees you pay.

It’s worth pointing out though that if you have a ‘final salary’ or ‘defined benefit’ (DB) pension, or if your pension has any other valuable guarantees, it might not be worth transferring out of that scheme.

If you have questions about whether pension consolidation could make sense for you, or whether you’re on track to enjoy the retirement you want, why not give us a call?

  1. Think about phasing your retirement

When approaching retirement, many suddenly realise that their pension pot isn’t quite as big as they had hoped, to help them achieve the lifestyle they want. They may also not be in a position to top up their pension significantly.

If that’s your situation, you could consider ‘phasing’ your retirement. This means that you retire gradually by going from full-time to part-time employment, taking on a job-sharing role, or perhaps working as a consultant or on an interim basis.

A phased retirement can allow you to retain some of the enjoyment of work while having the flexibility to pursue your other interests. It also means you’ll continue earning an income and will probably need less money from your pension.

This has several benefits. Firstly, more of your pension pot will remain invested and hence continue to enjoy potential compound growth. Secondly, you may be able to keep topping up your pension during this ‘semi-retirement’ phase. Thirdly, when you do fully retire, you could well have saved more money, which will provide you with a higher retirement income and a better quality of life, particularly as your pension will not need to support you for as long.

A period of ‘semi-retirement’ can also be a useful time to get a better feel for how much your pension will need to provide, as well as a gentle way to ease into a change of pace in life.

  1. Don’t forget your other investments

Income in retirement doesn’t only have to come from your pension savings, so if you’re worried that your pension pot isn’t big enough, it won’t necessarily mean your plans have gone out the window. You can also use any monies you have in an individual savings account (ISA) or any savings and a general investment account to help provide retirement income.

In fact, drawing income from ISAs in retirement could prove to be tax efficient. With a pension, you can usually withdraw up to 25% tax free (capped at £268,275), whereas the remainder is taxed as income. With an ISA, your withdrawals aren’t taxed at all, so taking an income from your ISAs could help to reduce your tax bill in retirement.

So, there is much to think about as you approach retirement. If you would like to discuss how to get your pension into shape pre-retirement, please do not hesitate to contact us.

Please note:

This article is for general information only and does not constitute advice.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.

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