If you have been paying into a pension, you will now have full access to it once you turn 55. The question is, what will you do with it?
There are a few different options you have when it comes to your pension, but choosing the wrong one could limit you later in life. Here are your choices…
Annuity
It used to be that this was your only option with your pension. Your contributions are invested in high risk/high growth assets in your younger years, then as you approach retirement, they are moved into more stable assets. This is designed to give you a steady income upon retirement.
Lump Sum
As of April last year, you are now able to access your full pension pot at age 55, meaning you can withdraw the whole amount as a lump sum or series of lump sums. This “freedom” allows you to have total control over your pension, but may mean that you are relying on a state pension to get by if you decide to spend it all quickly.
Drawdown
This option reinvests your pension into an income-generating portfolio, allowing you to withdraw your cash as and when you need it. Drawdown is the more popular alternative to annuity, however many pension providers automatically set funds up for annuities, and unless you have taken the necessary steps to implement a drawdown plan you may not be getting the best value out of your pot.
How to get the best out of your pension
In order to make the most of your pension fund, it’s best to start thinking about what you want to do as soon as possible. This allows time for planning, and chance to move from your pension provider’s default in order to maximise your savings. Here are some tips on planning your retirement fund effectively…
Get your bearings
Locate all of your pension funds and work out the combined value. You can then get a projection of the total value of your combined pots upon retirement.
Consolidate
Consolidating all of your pension pots into one big one has its benefits. You can save on fees, and you can maximise the size of the best performing fund. This isn't always the best thing to do though. Some defined contribution pensions have guaranteed annuity rates, and some may provide a guaranteed income. If you consolidate, you could lose these benefits.
Think about the future
Do you plan to go on a once-in-a-lifetime trip? How about any other big purchases like a retirement home or a car? If so, you should plan around these, work out their costs, and how much money that will leave you in your retirement fund. You can then begin to assess your options.
Talk to professionals
The best way to maximise your pension pot and plan for retirement is to speak to professional advisors. There are many hidden fees, benefits and issues that come with pensions and its best to get a proper understanding of them all to be sure you have made the right choices. Talk to your advisor about adjusting your pension to fit in with your plans, and if you need to increase (or reduce) your contributions you should arrange this too. It is also not too late to find a better value product in order to suit your needs. You can move your current funds across to get the best value and best suited pension for you.
If you’d like to talk to us about pensions and planning for retirement, please get in touch and we’ll be happy to help.
