With people living longer in retirement, it’s important to make your pension go further.
Firstly, keep tax bills to a minimum. The way you take benefits from your pension can affect the amount of tax you pay, so it’s important to think carefully before you make any withdrawals.
You are usually allowed to take up to 25% of your entire pension pot tax-free; you may choose to keep the remaining balance invested, or receive a taxable income from it.
If you decide to take out all the money from your pension in one go, you will be charged income tax at your highest marginal rate on the remaining 75% of your pension pot.
Pension freedoms introduced in 2015 mean that once you reach the age of 55 you can take as much cash out of your pension as you want.
However, taking a big lump sum from your pension could mean you pay more tax, so you should always work out how much tax you will have to pay before you take money out.
Remember that you may also pay income tax on your state pension, earnings from employment and any other income which, when combined with a pension withdrawal, could push you into a higher tax bracket.
Secondly, consider deferring your state pension.
The maximum you can receive under current rules is £159.55 per week, however, it’s a little-known fact that retirees can defer their state pension and get a higher income when they claim it later in retirement.
For someone who has sufficient income or savings to live off in the meantime, delaying the state pension can be attractive because the benefits can really add up.
The value of your state pension will rise by 1% for every nine weeks that you defer, which works out at just under 5.8% for every full year you delay claiming it.
Retirees looking to defer their state pension should always seek appropriate advice as it could affect other areas of financial planning and some welfare benefits.
Thirdly, top up your pension. Speculation remains over whether the UK Government will cut pension tax reliefs and allowances in an attempt to reduce public spending.
If you’ve still got a few years to go before retirement, you should think about boosting your pension savings now so that you can benefit from current rates of tax relief and potentially enjoy a higher income when you stop work.
Basic rate taxpayers receive tax relief at 20% of pension contributions, which is automatically added to their retirement pots.
If you’re a higher or additional rate taxpayer, you can claim an extra 20% or 25% through your self-assessment tax return. A pension contribution of £1,000 can cost a top-rate tax payer as little as £550.
Fourthly, see if you qualify for higher annuity income.
If you smoke, drink heavily or have health problems, then you could qualify for an impaired life or enhanced annuity.
These can offer much more income than standard annuities as pay-outs reflect your reduced life expectancy.
An enhanced annuity pays you a guaranteed income during retirement which is guaranteed for the rest of your life.
Even if you think any condition you have is relatively minor, it is always worth finding out whether you could qualify for this type of annuity as it could give a substantial boost to your retirement income.
Finally, combine your pension pots.
If you have several with different providers, it may be a good idea to combine them.
This will make it easier to keep track of your overall savings and estimated income at retirement.
There can be benefits to consolidation as many older-style pensions do not offer access to the new range of pension freedoms.
It could also be a good idea to consolidate if one or more pension pot has an inappropriate level of equity exposure, or is languishing in a poorly-performing fund.
Other schemes, such as defined benefit or final salary pensions, can be transferred but this will not be suitable for everyone. Any decision to transfer should not be taken lightly as you could lose valuable and sometimes guaranteed benefits.
It is important people take time to understand the pros and cons of consolidation and are clear on whether it’s right for them. This is where professional financial advice will really add value.