Money and me: I want to retire in my late 50s – do I take my pension early or use savings?

Money and me: I want to retire in my late 50s – do I take my pension early or use savings?

Picture retirement, and what it will look like may well vary greatly among different people. And, while financial situations won’t be the same for person-to-person, five financial experts have shared their thoughts on some options that one single 59-year-old who is looking to retire may have.

I’m in my late 50s (59), I live alone, and I’d like to retire. I had planned to take my pension at 60. I have a decent private pension and some savings to fall back on. I don’t know whether to take my pension at 60 or to wait and use up my savings instead. I own my own home but I need money to pay for living costs such as household bills and hobbies I enjoy doing.

Express.co.uk has contacted a number of expert financial planners, all of whom have shared their expertise on options for this retiree-to-be.

Sarah Lord, chief client officer at the UK’s largest independent wealth manager, Succession Wealth, said: “When approaching retirement it is important to consider your short, medium and long term objectives and financial needs in retirement to be able to make decisions on how best to use the financial resources you have available to support you in retirement.

“For example, as well as being able to cover your living costs are there any planned one off expenditure costs for example changing your car that need to be planned for?

“The volatility we have experienced in investment markets in recent weeks is likely to mean that your fund value is lower than it was at the beginning of the year so delaying drawing your pension provides the opportunity (but no certainty!!) for the value to recover and potentially provide higher income over your lifetime.

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“Conversely delaying drawing on your pension will mean that you remain exposed to the vagaries of the investment markets for longer, which you may be uncomfortable with.

“It is important to ensure that as part of your decision making you retain sufficient cash as an ’emergency fund’ – for those in retirement we would typically suggest at least six months expenditure but 12 months expenditure can often provide greater comfort and flexibility.

“Through your private pension it is likely that you have the option of taking up to 25 percent of the fund value as a tax free lump sum, depending on the contract you have in place you may be able to phase how you draw from your pension and therefore it is worth bearing in mind that you have flexibility to draw on your pension gradually to top up your savings before you start to draw a regular income from your pension, however, such an approach does continue to provide you with exposure to the investment markets which you would need to be comfortable with.

“Alternatively, if it is security of income you are seeking it would be worth exploring what income you could get if you used your pension to buy an annuity, by purchasing an annuity you forego flexibility in how you draw on your pension in return for certainty of income for the rest of your life.

“If you have any health conditions it could be that you qualify for enhanced terms and therefore your pension pot could provide a higher level of income.

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“There are a myriad of options available to you and therefore I would recommend seeking independent financial advice to discuss your situation and the options available to you so that you can have confidence that you have considered all avenues and can make the appropriate decisions.

“After all it is a big decision to make on the basis that, assuming good health, you could need your pension and savings to support you for another 30 years.”

Sharing her perspective, Victoria Hicks, group director at The City & Capital Group, said: “When approaching retirement, it’s important not to look solely at a pension pot as a source of income, but instead consider all your assets. Review what money you have where – and consider how best to structure a tax efficient income from the sources you have.

“Throughout the pandemic, pension funds may have dropped by 10 to 20 percent and if you draw on the money now, the loss will not be recovered. Therefore, if you can leave your pension fund to recover, a short-term use of savings might be the better answer – considering their low rates of interest.

“If you do take this option though, it’s important not to let your savings balance, or what we call an emergency fund, fall below a certain point – ideally (and appreciating this isn’t always possible) you always want to have six months’ worth of ‘expenditure’ to fall back on in case of an emergency.”

David Macdonald, founder of financial advisory firm The Path, also shared his thoughts on the matter.

“In this situation, I would encourage using the metaphor of ‘taps’ when thinking about various pots of money that can be turned off and on as circumstances dictate,” he said.

“For example, if you retire at 60 as planned and therefore have no income for the next seven years until state retirement age, that opens up the possibility of taking money from your pension which would ordinarily be taxable but, under the personal pension in these years, is potentially tax-free up to the amount of the personal allowance.

“So, it might be an idea to turn this ‘tap’ on for these few years and then turn it down when the state pension kicks in.

“Other savings could then be split between deposit accounts, which would take advantage of the £1,000 per annum in a personal savings account (PSI), and unit trusts, with a £2,000 tax-free dividend allowance and £12,300 capital gains in tax allowance. I would also advise maximising use of an ISA when ensuring any income or capital gain is subject to minimal tax.

Meanwhile, Michelle Gribbin, chief investment officer at Profile Pensions, said: “Looking at this from a purely pensions perspective (as opposed to wider financial planning) there are a number of different factors which need to be taken into consideration including your health, state pension entitlements and whether you predict the need for any large lump sums of cash in the future.

“A key consideration to start with is whether you’re looking to finish work when withdrawing your pension, or if your pension will be additional to other income.

“It’s also worth taking time to work out whether your income needs are fixed or variable, i.e. how will the amount of money you need change over time.

“If your needs are likely to be variable, then you could consider flexi access drawdown now and take a one off lump sum tax free.

“Don’t forget that when your state pension kicks in (you can check your entitlement and start date with HMRC) this could reduce the need to take cash from other sources.

“Dipping into your pension early can be a really helpful source of income if executed in a tax efficient way. However, it’s important to remember that deferring access, and thereby putting off buying an annuity until your older, will increase your income.

“Pensions remain significantly more tax efficient than other savings and investments so where possible it pays to leave this invested for as long as you can.”

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Published at Sun, 14 Jun 2020 03:00:00 +0000