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7 ways to guarantee a good retirement

7 ways to guarantee a good retirement

For some, retirement comes as a welcome relief. For those who love their job, it’s something to dread. Especially if you’re not prepared. Because whichever way you look at retirement, it’s vital to be in the best financial shape 

After all, it’s the start of a brand new chapter. One of life’s most meaningful moments. And one of the biggest changes in your day-to-day experience. Not least your income.

Even if you’re planning to ease your way into retirement by gradually cutting down on your hours, it’s still a big step. You’ll be making decisions about your main source of income which could affect you for the next decade or two – even longer. 

That’s why it’s common sense to have a flexible plan. One that reflects the way you want to spend your time, but also gives you the freedom to take on new opportunities and challenges.

To help you prepare for the day you finally hang up your boots at work, we’ve put together a list of 7 ways to guarantee a good retirement.

  1. Decide what you want 

It sounds obvious, but so few people take the time to sit down and decide what they want out of life, years into the future. 

The first step is to think about what you’d like retirement to look like. Maybe you’d like to move home, treat yourself to that sporty car, or travel to more exotic places, more often. It might be that you’d prefer to work part-time for the extra income, or just to keep busy. You could also volunteer, start a new hobby, or dedicate more time to one of your existing passions. 

Whatever matters most to you, having a clear picture to work with will make the cost of retirement easier to work out.

  1. Check where you’re up to

Granted, it’s a pretty big factor. But your pension is just one part of your retirement picture. You may also have income from ISAs, other investments or rental income from a property to fall back on. This stage takes a fair bit of time and energy. But it’s worth doing for two very good reasons. 

First, you’ll be able to plan much better, with a crystal clear idea of what’s possible with your likely pension and investment income. Second, you may find you’ve got more tucked away than you thought. Meaning you can do far more than you expected when you retire. 

So whether it’s knowing where you stand or simply having more to look forward to, it’s essential to see what your finances will look like when you retire. 

  1. Map out your income options

Thanks to a change in the pension rules a few years ago, there are now three ways you can access your money. These are:

  • Flexible Retirement Income 
  • Uncrystallised Funds Pension Lump Sum (UFPLS)
  • Guaranteed Income for Life (Annuities)

Flexible Retirement Income 

This lets you draw down your pension flexibly, so you can take whatever income you want. Plus you have the freedom to change how much you withdraw, so that your money stays invested and has the best chance to grow. You can then pass it onto your loved ones when you die. 

Why this option?

  • Leave your money in your pension and take an income from it
  • Take up to 25% as a tax-free lump sum immediately, or in stages
  • Take withdrawals whenever you like (income after the first 25% will be taxed as earnings)
  • The rest of your money stays invested
  • You can choose how much to take and how often
  • You can leave any funds you don’t withdraw to your family, beneficiaries or charities (if you die after you’re 75, your beneficiaries may have to pay tax on the money)

Sound good? Just a quick word of caution: If you take too much, or your investments underperform, you may not have enough left to live on during your retirement.

Uncrystallised Funds Pension Lump Sum (UFPLS) 

You can take all or part of your tax-free cash with the remaining amount moving into ‘drawdown’. On the other hand, you can make lump sum withdrawals. In this case, 25% of each withdrawal is tax-free, with the other 75% taxed as earnings. It’s something known as an Uncrystallised Fund Pension Lump Sum (or UFPLS for short).

Yet however enticing a UFPLS may sound, you need to be careful when you draw out more. For instance, if your 25% tax-free cash isn’t enough to live on, you can still withdraw as much as you want on top. But you’ll end up paying income tax on the extra money at your marginal rate.

As an example, let’s say you take more out than your 25% tax-free allowance. Or, you go one further and take out multiple lump sums. When it comes to any future contributions, the amount you can pay into your pension tax-free could drop from £40,000 to £4,000. This is known in the pension trade as the money purchase annual allowance. So keep in mind that the more you take out over the 25% limit, the more tax you could end up paying, which could have a big impact on your pension pot.

Why this option?

  • Leave your money in your pension and take lump sums as and when you need to
  • 25% of each lump sum withdrawn is tax-free, with 75% taxed as earnings (note that this could end up move up a tax band)
  • Take out as much as you want straight away and use it for whatever you want (though you may end up paying more tax)
  • The rest of your money stays invested.
  • You can choose how much to take and how often
  • You can leave any funds you don’t withdraw to your family, beneficiaries or charities (if you die after you’re 75, your beneficiaries may have to pay tax on the money)

As with the previous option, remember that if you take too much or your investments dip, you may not have enough left for your retirement.

Guaranteed Income for Life (Annuities)

Annuities provide you with a lifelong, regular income that’s guaranteed to last as long as you live. A quarter of your pension can usually be taken tax-free before you buy the annuity. Then, any payments beyond this 25% will be taxed as earnings.

There are different types of annuity to consider depending on your requirements and you will need to check the annuity rate. Rates have been quite low for many years but during 2023 we have seen a steady increase, making annuities a much more competitive option. Please note, it can take many years for the payments from your annuity to exceed the money you’d saved up in the first place.

What’s more, annuities aren’t flexible. So once you’ve bought your annuity, you have to stick with it even if life changes. And unless you choose an increasing annuity, the income you receive will remain the same each year. Of course, this doesn’t adjust in line with inflation, which means your money will buy you fewer annuities as the years go by.

Why this option?

  • Enjoy peace of mind knowing you’re guaranteed the income you’ve arranged and planned on
  • It’s more straightforward to plan for the future, knowing how much income you’ll have
  • You can provide an income to your spouse or partner, or leave any money left over to your loved ones
  • Your payments are fully protected by the Financial Services Compensation Scheme, so you’ll keep receiving them even if the company paying them is unable to
  • You can move your pension to an insurance company, who’ll provide you with a lifelong, regular income (taxed as earnings)
  1. Consider moving your pensions 

Chances are, you’ll move your pensions around during the course of your work life. Yet it’s important to do the same just before you retire. If you’ve changed jobs a few times, you’ll likely have a number of schemes in different places. Pooling them all together can make it much easier to plan. It will also makes it easier to manage your money in the years ahead.

It could open up more investment opportunities too, including more types of retirement income. For instance, some companies don’t offer a full range of options. And it may even save you money if you can find a cheaper provider. Especially if you plan to live for many more years to come. 

Even the smallest changes in price can add up to a big difference in lifestyle, so it pays to explore all your options.

  1. Beware of scams 

After your home, your pension could be the single biggest asset you have. Unsurprisingly, this makes it a target for scammers. 

There are so many out there, and some can be very convincing. Yet the usual rules of thumb apply. If something seems too good to be true, it probably is. So never act on any offer, without doing your homework first.

  1. Talk to an expert 

Big decisions call for lots of careful planning. But that doesn’t mean you have to muddle through by yourself. 

At Allisons, we’ll not only talk you through all your options. We’ll do most of the heavy lifting, too. You’ll find plenty of helpful guidance on our website. Plus, you can speak to one of our independent experts, obligation-free. 

  1. Walk, don’t run

After decades of careful saving, it’s tempting to start enjoying that pension pot you’ve put aside. But if you make the wrong decision, you’ll quickly find it wasn’t the right option for you. And by that stage, it’s too late to go back and change it. 

That’s why taking the time to do your research is crucial. So please, please don’t rush into any decisions around your pension. And if you can speak to an expert first, then do. They’re almost always in a better place to know the benefits and drawbacks of each scheme. Meaning they can make a world of difference to the income you’ll receive once you retire. 

By talking to us, you’ll also know the advice you receive is both impartial and matched exactly to the kind of retirement you’re looking for. Sound like a solid plan? Then whenever you feel ready, give us a call for a friendly chat.