It’s very easy to push your pension to the back of your mind — after all, it will be years before you benefit from it. However, putting money away towards your pension now is crucial to potentially enjoying financial comfort in later life.
A campaign by financial services firm, True Potential, has found that the British public believe an annual income of £23,000 is what they’ll need to live comfortably in retirement. However, most people are on course to receive just £6,000 each year from their retirement fund.
Clearly, we need to make saving for our future a priority, yet, with changes to pensions offering greater freedom, it can be difficult to know how to make the most of your pension pot. When the time comes, there are many ways you can access your pension pot, including:
Leaving it: Once you reach retirement age, you don’t have to start using your pension funds.
Rather, you can leave them until you need them.
An annuity: You could use your pension to purchase an insurance policy to guarantee an income for the rest of your life, regardless of how long you live.
Take the whole amount: You may want to pay off debt or make an investment. 25% will usually be tax-free, while the remainder will be taxed as an income at your highest marginal rate.
Take 25% tax-free: As we’ve already mentioned, in many cases you can take 25% of your pension savings without paying tax. The rest can be drawn as a regular income and you’ll pay tax at your marginal rate.
Take a regular income without a lump sum: If you don’t need the 25% lump sum, you can take a regular income instead, 25% of that will be tax-free and the rest taxed at your marginal rate.
A mix of the above options: If you have a larger pension pot, you may be able to mix the above options, giving you greater flexibility.
Planning is paramount to ensuring you have a pension pot you can rely on in the future. There are many ways you can prepare, from savings accounts to other investment solutions. Ultimately, the correct tools are imperative for securing your future.
Your capital is at risk. Investments can fluctuate in value and you may not get back the amount you invest.