Reviewing Your Pensions and Pots

You've looked at your pensions and weighed up the possibility of phasing your retirement, so what do you need to do now?

Make a Plan

Obviously you should start by making a plan. Remember we said before that plans are automatically wrong the second they’re faced with real life? That’s true, but the power of planning is in helping you think through what you might need to do now, in advance.

Earlier in this series we talked about building a timeline of year-on-year income so you know what is coming in and when. Then you can quantify the gaps in each year and from there, work out where the money to fill the gap should come from. The thought process is quite simple:

• How much do I want to spend in (say) 2025, the first year of my retirement?
• Knowing that, how much secured income do I have from company pensions, rental income, state pension, part-time work?
• Assuming that’s likely to be short of the amount that I want to spend, how much is the difference? This is going to need to come from capital, and if that’s the case.
• Then specifically where should it come from – which account, which asset class etc?

Check the Flexibility of Your Existing Pension Plans

The chances are you have quite a few pension plans amassed over various jobs or personal plans you’ve dabbled with and then moved on to the next thing. Back in episode 4 we talked about positioning the pieces, and you definitely need, as part of that, to check the ability of your existing pension plans to provide flexible benefits.

Specifically, you should check charges around so-called flexi-access drawdown and also see if UFPLS is an option. If you have plans which are not flexible enough to facilitate the withdrawal pattern you might need, then you are going to need to think about moving those pension pots. We talked about this in episode 4 of the season these blogs are based on, Positioning the Pieces, so check that out or listen again if you haven’t already.

Work out How Much Cash Lump Sum You Might Need or Want

Part of the decision about accessing your pots will be influence by any lump sum needs you have at retirement. Most of my clients have something they want to buy at retirement. That might be a camper van, might be a boat, or just a big holiday. Maybe think about your own lump sum cash needs and the timing of them well as the regular income you’re going to need.

Max Your ISAs to Bridge the Gap

If you’re on the home straight towards retirement, it’s worth making sure you have plenty saved in ISAs, as well as your pensions. It’s hard to balance to the two, but you want to make sure you have enough non-pension money set aside.

The thinking behind this is that if you retire early, then you may not be able to draw your pensions straight away. Remember the earliest you can draw from pensions is 55, but from 2028 that will rise to 57.

Watch for the Money Purchase Annual Allowance (MPAA)

Finally, a quick word about the money purchase annual allowance. We talked earlier about drawdown and UFPLS and such. Most of you will know that there is a maximum you can pay into a pension each year, and that is £40,000 or 100% of your earned income, whichever is lower.

There are wrinkles to that, particularly if you’re a high earner, but that’s basically it. But that changes if you take any taxable income from a DC pension plan. And that’s true even if, as in our earlier example, the income you take isn’t taxable because it falls into your personal allowance.

As soon as you take even £1 of taxable income from a DC pension, you are now subject to the MPAA, which is £4,000, so you won’t ever be able to put more than that into pension per year. Many of you will be think – so what? Why would I want to put IN to a pension when I’m retired? Well, you’d be surprised. Tax relief is a powerful motivator for adding to pension schemes.

And if you have a decent DB scheme income, plus some earnings from, say, part time work, then you might want to put any extra income you don’t need away for when you decide to give up work altogether. So just be aware – there can be implications to any of your decisions that you may not know about.

Next up: longevity.