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Smart ways to boost your retirement income

01 February 2018

You’ve prudently saved into your pension all your working life. But now you’ve reached retirement, it’s important to make sure these savings work as hard as they possibly can for you. Here are some ways to maximise your retirement income.

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice. Tax rules can change in future. Their effects on you will depend on your individual circumstances.

What you’ll learn:

  • How the amount of income you take from your pension affects how much tax you’ll pay.
  • How deferring your State Pension could boost your retirement income later on.
  • How you can track down any forgotten pensions.

Managing your money in retirement can seem daunting if you're used to receiving a monthly salary from your employer. You’ll need to decide how you're going to take an income from your pension so that you can maintain your current standard of living, while at the same time ensuring that this income will last for the remainder of your life.

Maximise your income by minimising your tax bills

A good starting point is to look at how you plan to take an income from your pension, as this will affect the amount of tax you pay.

Find out more about why it’s important to plan

Many people now belong to defined contribution or money purchase pension schemes. With this type of pension, you and your employer both make contributions, which are generally invested in the stock market. The value of your pension at retirement depends on how your investments have performed.

Self-invested personal pensions, a type of personal pension that usually offers you access to a wider choice of investments than other types of pension, are also defined contribution schemes. These are likely to be most suited to experienced investors who are comfortable choosing and managing investments themselves.

Find out more about our Self-Invested Personal Pension (SIPP)

If you have a final salary or defined benefit pension, however, you'll typically receive a guaranteed income when you retire, based on your earnings and how long you've worked for your employer.

Prior to pension reforms introduced in April 2015, most people used their defined contribution pensions to buy an annuity, or income for life. Now, however, you have the option after age 55 (rising to 58 in 2028) to draw money from your pension whenever you want to, as long as your pension provider offers this flexibility. If it doesn’t, you may need to transfer to a different provider that allows you to make withdrawals from your pension if you want to do this.

If you want to access all the money in your pension pot in one go, you can normally take 25% of it as a tax-free lump sum, but you’ll be charged income tax on the remaining 75% of your pension pot in the tax year of receipt. This could result in you paying more tax than necessary. So read on.

Alternatively, you might choose to leave your money in your pension and take sums out when you need to. In this case, you can either take 25% tax-free in one go, as part of each drawdown, or however you want. The remainder of your pension will be charged at your marginal rate of income tax.

Another thing to bear in mind is that taking a big lump sum from your pension could push you into a higher tax bracket, so think carefully about how much you withdraw each tax year. Put simply, the more you take out in one year the higher your marginal rate of tax is likely to be and so the more tax you’ll pay.

Remember that your tax-free amount doesn’t use up any of your personal allowance, which is the amount of income you don’t have to pay tax on. This tax year (2018-19) the personal allowance is £11,850.

Bear in mind too that if the value of all of your pension benefits exceeds the current Lifetime Allowance of £1,030,000, any excess attracts a tax charge of 25% if it's withdrawn as an income (for instance from an annuity or a drawdown arrangement) or 55% if it's withdrawn as cash lump sum. This is in addition to any income tax payable. The Lifetime Allowance is a limit on the amount of all your pension savings without triggering an extra tax charge.

Remember that tax rules can change at any time in the future. Any favourable treatment currently available could later be altered or removed altogether. In any case, the value of any tax breaks to you, depends on your individual circumstances, which can also change over time.

Could you be eligible for higher annuity income?

Many people still opt to take out an annuity when they retire because they like knowing that they won’t be able to outlive their savings or want the certainty of knowing they will receive a specific level of income each year. Remember though that annuity rates can vary widely, so if you're considering taking this route, make sure you shop around for the best deal as you don’t have to take the annuity rate offered to you by your pension provider.

If you're unsure of your options, or what might be best for your circumstances, it's worth getting some independent financial advice as annuities can come in a variety of guises. For example, while a single life annuity, the most common type, pays an income just to you, a joint life annuity will pay you until you die, after which the income would go to your partner. Also, you might be able to get a higher income if you qualify for an ‘impaired’ or ‘enhanced’ annuity as a result of any medical condition, such as high blood pressure or diabetes – or if you're a smoker. Even if you think any ailment you have is relatively minor, it's always worth checking whether you could be eligible for this type of annuity, as it could provide a major boost to your retirement income.

Track down all your pensions

If you’ve had a number of different jobs over your lifetime, make sure you track down any pensions you might have contributed to over the years, as these could help supplement your retirement income.

If you think you might have lost the paperwork for any pension schemes you paid into, you can trace lost pensions through the Pension Tracing Service on 0845 6002 5371.

Claim your State Pension

Make sure you claim any State Pension you’re entitled to. You won’t receive this automatically once you reach retirement, so the onus is on you to claim it.

The State Pension changed on 6 April 2016, with the new rules affecting anyone who reaches State Pension age on or after this date. The new State Pension is £164.35 a week, but to receive this maximum amount, you'll need to have made 35 years’ worth of National Insurance Contributions. If at any time during your working life you have been ‘contracted out’ of the State Pension, you may get a lower amount than this. 

However if you do have some gaps in your National Insurance Contributions, you may be able to top them up by making some voluntary contributions. If you're unsure of your contribution record you can request a State Pension statement via the Gov.uk website.

Some people choose to defer their State Pension because it enables them to receive a higher pension later on. This will boost your retirement income at that stage, although you'll need to work out if you can afford to forgo this income in the meantime. For each year you defer, you’ll get an increase of around 5.8% in your State Pension.

Continue working

If your retirement income is still stretched, then taking on a part-time role can be one of the best ways to supplement your retirement income. Some older people decide to set up their own businesses, but it’s always a good idea to seek professional advice if you're considering taking this route to help with tax planning and to ensure you choose the right company structure to suit your needs.

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