Smart ways to boost your retirement income

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. Whilst any State Pension you qualify for will be paid to you in a similarly regular way, thereafter 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.

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 then invested. The value of your pension at retirement depends on how your investments have performed.

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

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.

Prior to pension reforms, which were introduced in April 2015, most people used their defined contribution pensions to buy an annuity, or income for life. Now, however, as long as your pension provider offers the flexibility, you have the option to draw money from your pension after age 55. However, the Government have announced an intention to link this age to 10 years prior to the State Pension Age. If this passes into law, the minimum pension age will increase in the future. If your provider doesn’t offer this flexibility, 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 out 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 the 25% tax-free in one go, in instalments or as part of each drawdown withdrawal. 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 large taxable drawdown 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 (£12,570.

As of 6th April 2024 there will no longer be a maximum amount of pension savings that you can build up over your lifetime. The limit, known as the Lifetime Allowance (LTA), is currently £1,073,100. Any excess was previously taxed at a maximum of 55% but as of April 2024 this will no longer be the case. Until then, whilst the LTA remains in place, the LTA tax charge will be removed, meaning no one will pay an LTA tax charge from 6 April 2023.

The changes mean that you can save into your pensions without the concern of a lifetime allowance tax charge should you breach the limit.

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 are 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 are unsure of your options, or what might be best for your circumstances, it is 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 are a smoker. Even if you think any ailment you have is relatively minor, it is 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 £203.85 a week, but to receive this maximum amount, you will 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 have some gaps in your National Insurance Contributions that will reduce your entitlement but you may be able to top them up by making some voluntary contributions. If you are 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’ will 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 are considering taking this route to help with tax planning and to ensure you choose the right company structure to suit your needs.