Retirement – Real People, Real Questions

Pensions

MoneyPlus Features Team

9th May 2016 at 12:21pm

At one of our recent retirement events we had the pleasure of really getting to know some of our customers. We got to learn more about their individual circumstances and the things that worry them most about retiring.

What’s a retirement event?

Well, they’re free events hosted by us across the UK. They give you a chance to come along and find out more about retirement and the different options available to you – they’re best suited if you’re around 10 years from retiring but everyone’s welcome. Oh and there are always snacks and refreshments on the go too.

You can find out more about our retirement events here – but if these types of events aren’t your thing, we completely understand. So we thought we’d pull together some of the most popular questions asked by our future retirees. Here’s what they had on their minds:

Will taking money from my personal pension affect my State Pension?

No, your State Pension is based on your National Insurance contribution history, and is completely separate from any personal pensions you have. Any other State benefits you have could be affected though – so it’s best to check.

Do I still need to buy an annuity (fixed income)?

If you want peace of mind that you won’t run out of money when you retire then an annuity could be a good choice for you. However the new pension freedoms mean you now have much more flexibility over how you access your pension savings – it’s no longer simply a choice between an annuity (fixed income) and drawdown (flexible income). The choice of buying an annuity will depend very much on your specific circumstances. You also have the opportunity to take a fixed income with a mix of other options to find the right fit for you. Let’s look at some examples:

• Balance of peace of mind and flexibility – You could use some of your pension savings to secure a fixed income to cover the essentials such as bills and living costs then use the rest to cover life’s extras.
• Change to an annuity anytime – For example, you could start with drawdown to give you more flexibility in the earlier years of your retirement. Then when you reach 75, you could buy an annuity. This would give you a guaranteed income for the rest of your life, allowing you to relax and enjoy the rest of your retirement in the knowledge that you have a secure income.

What types of annuity are there?

There are many different types of annuity options out there so it’s important that you familiarise yourself with all the options when you’re shopping around. Your annuity options will have to be agreed when you buy it, and it’s unlikely you’ll be able to change them later, so think carefully before making any decisions. Annuity options can include:

• Fixed for you – This means that you’ll be the only person that will receive an income either for life or for a fixed number of years.

• Fixed for two – This means your payments will continue to be paid to your spouse or partner after you’re gone.

• A guaranteed period – This is where you fix the number of years you’ll receive payments. If you die within that time, payments to your spouse or partner will continue to the end of the guaranteed period.

• Staying in line with rising prices – By choosing an annuity that moves in line with inflation you’ll get an income that competes with rises in the cost of living, giving you a better chance of a comfortable retirement.

• Getting higher income for poor health – If you smoke, have health or certain lifestyle issues you could qualify for a higher income.

However, adding more options will reduce your starting income and you won’t be able to change your mind later. Take a look at our guide on fixed income to find out more about the options.

How much tax will I pay if I cash in my pension savings?

When you cash in your pension savings you’ll usually get 25 percent tax-free. The remaining 75 percent is taxable and will be added to any other taxable income you have in that tax year. So think carefully before you take your money because adding a large cash sum to your income could move you into a higher rate tax band.

Don’t be surprised if your pension provider has to deduct emergency tax when you take cash from your pension – this is because of HM Revenue and Customs (HMRC) guidelines. But don’t worry, you can reclaim it from the taxman. Read our handy guide on reclaiming tax on cash from your pension.

What constitutes my income?

Your ‘income’ can be made up of a number of different sources and can include:

• The State Pension

• Payments from personal pensions (not including any tax-free cash lump sums)

• Earnings from employment or self-employment

• Taxable State benefits

• Money from investments, property or savings

If I take my tax free cash do I need to start taking an income?

No, you don’t need to. The great thing about the pension freedoms is that you have so much more flexibility when it comes to taking your pension. Here’s what you can do with a flexible income:
• Take your tax free cash and leave the rest of your pension pot invested

• Take an income – and change this anytime you want

• Dip in to your savings and take a cash withdrawal anytime you like

• Keep your pension savings invested, giving them the potential to keep on growing

• Change your mind and buy an annuity, anytime

Remember though, your savings will stay invested so you’ll have to be comfortable taking the risk that if investments don’t perform well enough they might not be able to sustain the amount of income you’ll need in retirement.

Can I continue to pay into my pension and withdraw money at the same time?

Yes, you can. But once you start taking a taxable income (any amount above your tax free cash entitlement) from your pension your annual allowance will be replaced by the Money Purchase Annual Allowance (MPAA) and will drop from £40,000 to £10,000. So be careful not to let your pension contributions exceed this amount because they won’t qualify for tax relief.

If your future contributions will be affected by the MPAA, you could even think about supplementing your income in the early years of retirement by making withdrawals from other sources like an ISA.

Will my children have to pay inheritance tax on what’s left in my pension?

If you opt for flexible income or drawdown then you’ll be able to pass on what’s left of your savings to your loved ones, free of inheritance tax, when you die.

If you die before age 75, this will be completely tax free. And if you die after age 75 or over, they’ll be able to access your pension savings flexibly, at any age, subject to tax.

Find out more about flexible income and if it’s right for you.

Got some questions of your own?

If you’re approaching retirement and still have some unanswered questions, you should think about contacting a financial adviser or get in touch with one of the qualified experts at Standard Life Direct for some straightforward information and guidance.

You can also access the government’s Pension Wise service for free and impartial guidance on your retirement options. Join the conversation and follow us on twitter @StandardLifeUK and Facebook.

The information in this blog or any response to comments should not be regarded as financial advice. Information correct as of April 2016. A personal pension is an investment and its value can go up or down and may be worth less than you paid in. Laws and tax rules can change in the future and your personal circumstances also have an impact on tax treatment.

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