If you’re in your 50s or 60s and approaching retirement, you might be feeling overwhelmed about planning your finances for the decades to come. If you’re feeling uncertain about your pension, you’re not alone. But the good news is that seeking professional pension advice can help turn that anxiety into confidence.
Here, we look at why pension advice matters, along with some of the ways it could help you feel more financially secure both now and in the future.
If you’re considering seeking professional financial advice on the options available to you, we’ve partnered with nationwide independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial advisor. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 2,000 reviews on VouchedFor, the review site for financial advisors.
Why pension advice matters
Your pension is likely to be the biggest savings pot you have, so it’s crucial that this money works as hard as it possibly can for you both in the run up to and during your retirement.
A professional pension advisor can offer clarity on the following:
1) Investment strategy
Understanding where your money is invested and how it aligns with your retirement goals is crucial if you want to have a clearer picture of how much your pension is likely to provide you with when you retire.
Most pension schemes automatically enrol members into a ‘default fund,’ typically a lifestyle fund designed to suit the average investor. These funds usually start with a higher allocation to equities (stocks) for growth and gradually shift towards lower-risk assets like gilts (government bonds) and cash as retirement approaches. This strategy aims to protect your fund’s value from market volatility near retirement. You can find out more about lifestyle funds in our guide What is pension lifestyling?
However, this approach may not be right for everyone. For instance, if you plan to keep your pension invested during retirement, a less cautious investment strategy might yield potentially better returns, although you must be comfortable accepting a higher level of risk.
If you’re uncertain about your pension investments or need personalised recommendations, consulting a financial advisor can be beneficial. They can help assess your risk tolerance, retirement goals, and investment horizon and, based on the information you’ve provided them with, recommend investments for you that are appropriate for you based on your individual circumstances. Learn more in our article Where is my pension invested?
2) Tax implications
Pensions have significant tax benefits, which many people aren’t fully aware of. For example, the government adds tax relief to your pension contributions based on your income tax rate: This means that if you’re a basic-rate taxpayer, for every £80 you contribute, the government adds £20, making a total of £100 in your pension.
If you’re a higher-rate taxpayer who pays income tax at a rate of 40%, you can claim even more pension tax relief back, so paying £100 into your pension will cost you just £60. You’ll usually get 20% of this back automatically, and then you will have to claim the remaining 20% through your tax return or by calling HMRC. The same goes if you’re an additional rate taxpayer, only you can claim an additional 25% on top of the usual 20%, giving you total pension tax relief of 45% (or in other words, you can effectively pay £100 into your pension having only contributed £55 yourself. Find out more in our article How does pension tax relief work?
You’re only entitled to tax relief on up to 100% of your earnings, or £60,000 a year, whichever is lower. This is known as your Annual Allowance. Learn more about pension allowances in our article How do pension allowances work?
An advisor can help you maximise tax relief and understand allowances to enhance your savings, and also look at the most tax-efficient ways to take an income from your pension.
3) Withdrawal options
Working out the best way to take an income from your pension isn’t always straightforward. An advisor can talk you through the various options to help you decide how best to take money out of your retirement savings, whilst keeping tax bills to a minimum.
Options include:
Flexible drawdown (Flexi-access drawdown)
This option provides flexibility, allowing you to withdraw income as needed while keeping the remaining funds invested. The first 25% of your pension pot is tax-free; subsequent withdrawals are subject to income tax. It’s crucial to ensure you have other income sources to cover essential expenses, as the remaining funds are still invested and subject to market fluctuations. Learn more about drawdown in our article What is pension drawdown and how does it work?
Annuities
An annuity provides a guaranteed income for life, offering financial security. However, once purchased, an annuity typically can’t be changed or reversed, meaning you lose access to the lump sum. In times of low interest rates, annuity rates can fall which might result in lower income than other options. Currently though, annuity rates are competitive – you can find out more in our article Annuity incomes reach record high – is now the time to buy? It’s worth noting too that unless you buy an annuity with inflation protection, your income may not keep up with the cost of living
Taking your entire pension as cash
While tempting, withdrawing your entire pension pot as cash can lead to significant tax implications, as the amount is added to your income for the year. This could push you into a higher tax bracket, resulting in a substantial tax bill. Withdrawing all your funds at once may deplete your retirement savings prematurely. Learn more in our article Six questions to ask yourself before taking money out of your pension.
Leaving your pension untouched
If you have other income sources, you might choose to leave your pension invested, allowing it to grow over time. This strategy can be beneficial if you don’t require immediate access to the funds and wish to maximise potential returns.
You can find out more about the different ways to take an income from your pension in our guide 10 years of pension freedoms: what are your pension options at retirement? Understanding the various pension options you have is crucial for securing a comfortable retirement. Each choice has its advantages and considerations, and professional advice can help you navigate these decisions effectively.
4) Consolidation
If you’ve worked for several employers over the years and have paid into various different workplace schemes, you might find it difficult to stay on top of your various pension pots. Consolidating multiple pension plans can simplify management and reduce fees, but it’s vital to assess the implications before making changes.
For example, some older pensions come with valuable guarantees or benefits that could be lost if transferred, or may come with hefty exit fees. An advisor can review each of your pensions carefully to ensure consolidation supports your long-term goals. Learn more about consolidating your pensions in our article Should I consolidate my pensions?
A final thought…
Planning for your retirement doesn’t have to be a source of stress. With the right advice, you can make informed decisions that can help you work towards achieving your retirement goals.
Remember, it’s never too late to take control of your financial future, and if you’re not confident going it alone, seeking pension advice is one proactive step you can take towards building a secure and fulfilling retirement. Pension advice does come at a cost, but often its value far outweighs and charges you pay. Learn more about this in our article How financial advice could boost the value of your pension by £47k.
It’s worth noting too that you can help cover costs with the Pension Advice Allowance, which allows you to withdraw up to £500 from your pension pot to pay for financial advice up to three times in your lifetime. This allowance is tax-free and can be used at any age, provided you have a defined contribution pension. You can read more about it in our article What is the Pensions Advice Allowance?
If you’re considering seeking professional financial advice on the options available to you, we’ve partnered with nationwide independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial advisor. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 2,000 reviews on VouchedFor, the review site for financial advisors.
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