10 tips for prioritising your retirement savings
We talk a lot about planning for your future, but it’s up to you to build up a retirement savings pot throughout your working life, and it’s never too early to start.
To get you started, here are ten basic pre-retirement steps to consider.
Bank account – Avoid paying income tax on any interest earned above your personal savings allowance, by not holding excess cash in your bank account. Don’t rush into taking money out, wait until you actually need it.
- Use your Individual Savings Account (ISA) savings to initially provide a retirement income – You can cash in your ISA at any time and payments are tax-free, so they won’t affect the amount of tax you pay. Using your ISA savings can help you top up your income when moving from full-time work to reduced hours to full retirement. The value of an ISA will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than you invested. The favourable tax treatment of ISAs may not be maintained in the future and is subject to changes in legislation.
- Cash in your pension tax-free lump sum – Up to 25% of your pension fund can be paid as a tax-free lump sum. You can do this from age 55, and as the amount is tax-free it won’t affect the amount of tax you pay. When you take a take-free lump sum from your pension fund, you have to do something with the balance of the fund such as buy an annuity, take a taxable lump sum or go into income drawdown.
- Use your personal tax allowance - If your income is less than your personal tax allowance, you won’t pay any income tax. Think about topping up your income to your personal tax allowance using income from your pension.
- Taking smaller pension pots - With the exception of the 25% tax-free lump sum from your pension, any further income taken from your pension fund will be taxed under the income tax rules. Cashing in up to three small personal pension pots (under £10,000 each) that you may have accrued doesn’t trigger the ‘money purchase annual allowance*’ limit and means you can keep saving within the annual allowance of £40,000. Any ‘small pot’ lump sum taken will normally consist of a 25% tax-free lump sum with the remainder taxed under the income tax rules.
- Taking your pension income - If you have an income drawdown fund, you should generally access your pension income last after accessing your ISA, and pension tax-free lump sum, as any pension income will be taxed under the income tax rules. This could help your retirement income to last longer, although this option may not be right for everyone. A financial adviser will advise you of the best course of action to take based on your specific circumstances.
- Never push yourself into a higher tax bracket. Remember pension income, including the State pension, is potentially taxable - Be careful not to take out too much pension income in any tax year if you’re using income drawdown in case this pushes you into a higher tax bracket. Only take out as much money as you need.
- Pension savings can be passed on tax-free to your loved ones - Pensions, unlike ISAs and LISAs don’t form part of your estate, so inheritance tax isn’t normally payable.
- Fill in the gaps - If you have ‘gaps’ in your national insurance contributions, top them up during your working life to ensure you get the maximum state pension entitlement when the time arrives. A state pension forecast will help you.
- Thinking about bringing your pots together - It’s important to keep track of all your pension savings, but you might need to find a few lost ones first. You may consider transferring them into one pot. A word of caution, however – be careful to check the terms of your old pension, it may be a lucrative defined benefit scheme or have valuable options such as guaranteed annuity rates on retirement.
*The money purchase annual allowance (MPAA) is £10,000, and applies when people first flexibly access their DC pension (other than small pots) above the 25% tax free cash sum. The Government intended to reduce the MPAA to £4,000 from 6 April 2017, but implementation has been delayed as a result of the General Election.
This information is correct as of 27 April 2017.