Approaching retirement: Less than a year to go
With retirement just around the corner there are some important decisions to be made. Here are some key points to consider, but bear in mind that the devil is in the detail. You may want to take further guidance, as these decisions could affect your lifestyle for the rest of your life.
Work out where you stand financially
Before making any decisions about how to take your pension, it's a good idea to get a detailed picture of your finances.
Get up-to-date statements from your personal and company pension providers. These will still be estimates until you are around six weeks from retirement when they will be able to send you a personalised quotation.
Also request a state pension forecast. This will contain details of your basic state pension and any additional state pension you will receive. This can be obtained at direct.gov.uk.
You may also be entitled to additional state benefits in retirement. Again, direct.gov.uk can help you work out your entitlement.
As well as your pensions, include any other savings and investments you have as you will be able to use these to supplement your pension income.
Think about your outgoings too, factoring in any loans or outstanding mortgage payments that you might need to clear when you retire.
Decide what you want to do with your pension pot
If you havent already, now is the time to make the decisions about how you take money out of your pension. If you have a Self Invested Personal Pension (SIPP), you can either take an annuity, which gives you a guaranteed income for life, or opt for income drawdown, where your pension remains invested and you have greater flexibility over your income.
If you are interested in income drawdown you will need to check with your provider that you have sufficient funds to do so.
Use our tool to help you decide which option is right for you.
No matter which route you choose, you can normally take up to 25% of your pension pot as a tax-free lump sum. As this can be a significant sum, it's worth thinking about what you would like to do with it. You can spend it or you might want to invest it to generate additional income in your retirement.
Choosing an annuity
An annuity gives you the peace of mind that, however long you live, you'll have a guaranteed income. But it's a once-in-a-lifetime decision. After you've chosen an annuity, you can't change it so it's important you give your choice some careful thought.
Like any other form of income, annuities are subject to tax. There are many different types available and the amount you receive will depend on a number of factors. You can choose to increase the amount you get by a set percentage or link it to inflation. Alternatively, you can decide to have guaranteed payments for a set period, even if you die. You might also qualify for a higher annuity rate if you have serious health problems.
You may also want to think about what you want to happen to your pension when you die. Annuity payments will stop unless you take an annuity with an option for a partner or adult dependant to receive a pension if you die before them.
It's worth shopping around, too, as you don't have to take the annuity your pension provider offers you.
Choosing income drawdown
If you have a SIPP, you have the option of leaving your money invested and drawing an income from it. The amount you can take is subject to government-set limits, which is determined amongst other factors by the size of your pot. This income is also taxable.
You can take income payments and recycle them back into your pension to build an additional pension pot. This would enable you to take a second tax-free lump sum based on this recycled pension pot.
As there is a risk that your pension pot is eroded by poor stock market performance, you will need to have a pension fund worth at least £50,000 before you can consider income drawdown.
Income drawdown isn't right for everyone so it's a good idea to speak to a financial adviser. Alternatively, call Standard Life on 0845 279 8810. Calls may be monitored and/or recorded to protect you and us and help with our training. Call charges will vary.
Sorting out your paperwork
Whatever you decide to do with your pension pots, you'll need to complete some paperwork in order to receive income.
Most company pension providers will contact you a few months before your stated retirement date to finalise all the details. Personal pension providers usually get in touch four to six months in advance, but check with the administrator of your scheme so you don't miss any deadlines.
The Pension Service will also contact you with details of how to claim your state pension. This usually happens around four months before you reach state retirement age.
You can defer taking your state pension and you will receive additional pension funds or a lump sum for doing this. More information can be found at direct.gov.uk.
You will also need to complete a pension coding form to make sure you don't pay too much tax in retirement. HM Revenue & Customs will automatically send this to you one month before you reach state retirement age but, if you're self-employed, you will need to request a form or download it from hmrc.gov.uk.
Make a plan for life after work
In addition to sorting out your retirement finances, don't forget to think about how your life will change when you retire. You'll have much more free time to enjoy in retirement, so think about how you'd like to spend it.
Making the transition from full-time work is a major milestone, especially if you're giving up work completely. Having a plan in place for the first few months of retirement will make this transition easier and will help set the tone for your new lifestyle.
Whatever you do, start your retirement by celebrating your new-found freedom. You've worked hard for it; now's your time to enjoy it.