Navigating complex decisions to shape your retirement finances
Changes to the retirement landscape and Pension freedoms have put a greater onus on people to keep themselves informed. Since 2015 the range of options when accessing their pension has increased. Little knowledge of the rules might mean making the wrong decision.
Understanding retirement savings is critical for people over 40. The 2015 Pension freedoms have given people access to pensions from age 55. The reforms have given greater power over spending their retirement pots.
Greater choices and flexibility
In 2015 new freedoms removed the need to buy an annuity. Income as well as your tax-free cash could be varied each year. Flexi-access drawdown and UFPLS were introduced. Drawdown was previously restricted to wealthier savers. The removal of a 55% ‘death tax’ on pension pots was also changed. Since then more than £35 billion has been withdrawn by 1.4 million people. These are figures according to HM Revenue & Customs data.
Pension freedom applies to people with ‘defined contribution pension schemes, and they don’t apply to ‘final salary’ or ‘defined benefit pensions. These types of schemes provide a guaranteed income after retirement.
Freedom numbers set to rise
Analysis revealed that the number of new people reaching 55 peaked in 2020. The ONS has estimated that a consistently high number of 55’s will retire. This will continue from 2020 to 2026. The Government has introduced a revised state pension age of 67. Estimates showed 941,000 people turned 55 in 2020 – more than any other age group. Population estimates over the next six years showed that those approaching 55 will be above 900,000.
Consider alternative options
The (COVID-19) crisis has changed many people’s views on retirement. Just because you have the option to retire early does not mean you should, and the government is considering encouraging people to work longer.
The Covid-19 crisis saw more people accessing pension funds earlier than planned. While this may solve a short-term issue, it leaves less of a retirement fund. Taking larger amounts out of pensions also has tax implications, and it may be better to consider alternative options.
Think ahead to retirement and plan for the future
It’s always important to think ahead about retirement. Even more so, especially since the COVID crisis.
The changes to the current retirement landscape and pension legislation have introduced more choices. However, with more choices comes more confusion. The best option will vary for each person. The dilemma about how much income you can take is much more important. Take too much, and you run out of money early. Take too little and your retirement might not be as fulfilled as expected.
In the USA retirees seem to take too much income in retirement. Whilst in Australia too little is taken.
A good financial planner will help you understand the issues you face. They should also recommend a level of sustainable income.
Don’t rush into making life-changing financial decisions. Please contact us to make an informed decision about what is best for you.
Source data: https://www.ons.gov.uk/ peoplepopulationandcommunity/ populationandmigration/
