As we approach retirement, one of the most important considerations is ensuring that our pensions provide us with a secure and comfortable future. With the right strategies in place, it’s possible to maximise the value of our pension pots, ensuring that our hard-earned money works efficiently for us in retirement. In this blog, the experts at Bulley Davey explore some practical approaches to help you get the most out of your pension.
Understand your pension options
One of the first steps to maximising your pension is understanding the different types of pensions available and how they work. In the UK, we generally deal with two main types of pensions: defined benefit (DB) schemes and defined contribution (DC) schemes.
A DB scheme, often known as a final salary scheme, guarantees a specific income in retirement, based on your salary and years of service. These schemes are becoming rarer, but if you have one, it’s crucial to understand how it works and how it fits into your overall retirement planning.
DC schemes, on the other hand, depend on the contributions you and your employer make, plus any investment growth. The value of a DC pension pot can fluctuate based on market performance, which makes it essential to actively manage your investments.
Review your pension contributions regularly
Regularly reviewing your pension contributions is vital for building a healthy retirement fund. The government currently offers tax relief on pension contributions, effectively boosting your savings. For instance, a basic rate taxpayer receives a 20% tax relief, meaning a £100 contribution only costs £80. Higher rate taxpayers can claim an additional 20%, while additional rate taxpayers can claim 25% through their self-assessment tax return.
In the 2024/25 tax year, the annual allowance for pension contributions remains at £60,000. This means you can contribute up to this amount without facing a tax charge, assuming you have sufficient earnings. If you haven’t used your full allowance in the last three years, you can carry forward unused allowances, potentially allowing for significant contributions in the current tax year.
We recommend setting a reminder to review your contributions annually, preferably before the end of the tax year, to make the most of your allowances.
Abolition of the lifetime allowance
The lifetime allowance was abolished in the UK for the 2024/25 tax year, starting on April 6, 2024. It was replaced with a Lump Sum Allowance of £268,275 and a Lump Sum and Death Benefit Allowance of £1,073,100.
If an individual exceeds their available lump sum and death benefit allowance during a relevant benefit crystallisation event, the excess amount of the lump sum or lump sum death benefit paid will be taxed at the recipient’s marginal income tax rate.
After the first relevant benefit crystallisation event, the individual must assess their remaining lump sum and death benefit allowance for each subsequent event.
For those who had benefit crystallisation events before 6 April 2024, transitional rules will apply to determine their lump sum and death benefit allowance at their first relevant benefit crystallisation event. These transitional rules are effective from the 2024-25 tax year.
Start drawing your pension at the right time
When and how you start drawing your pension can significantly impact your retirement income. The minimum age to access your pension will rise to 57 from 6 April 2028, but for those nearing retirement, it remains 55. However, just because you can access your pension doesn’t mean you should.
If possible, delaying withdrawals can allow your pension pot to continue growing, potentially increasing your income in the long term. Additionally, drawing too much too quickly could push you into a higher tax bracket, reducing the overall efficiency of your savings.
We suggest seeking advice before you start drawing your pension to ensure you understand the tax implications and the impact on your long-term financial security.
Make the most of pension freedoms
Pension freedoms, introduced in 2015, provide greater flexibility in how you can access your pension. You can now choose from several options, including taking your entire pension as a lump sum, purchasing an annuity for guaranteed income, or keeping your money invested and drawing it down as needed.
Each option has its benefits and drawbacks, and the best choice will depend on your individual circumstances. For instance, taking a large lump sum might seem appealing, but it could result in a significant tax bill. On the other hand, purchasing an annuity guarantees a fixed income for life but might not offer the same potential for growth as leaving your money invested.
We recommend considering a combination of these options to balance security and flexibility. Again, seeking professional advice can help you tailor a strategy that suits your needs.
Don’t overlook state pension
While your workplace and personal pensions are essential, don’t overlook the role of the state pension in your retirement planning. The full new state pension is £221.20 per week as of the 2024/25 tax year. To qualify for the full amount, you need 35 years of National Insurance contributions.
If you have gaps in your National Insurance record, you may be able to top them up by making voluntary contributions. Checking your state pension forecast is a good starting point to understand what you’re likely to receive and whether any action is needed to maximise this income.
Plan for your retirement income needs
Finally, it’s important to have a clear understanding of your retirement income needs. Many people underestimate how much they’ll need to maintain their desired lifestyle in retirement. We suggest creating a detailed budget that considers your essential living costs, discretionary spending, and any potential changes in circumstances, such as healthcare needs.
Once you have a clear picture of your income needs, you can align your pension strategy to meet these goals. This might involve adjusting your pension contributions, reviewing your investment strategy, or considering other income sources.
Come to us for advice
Maximising your pension is about making informed decisions throughout your working life and into retirement. By understanding your options, regularly reviewing your contributions, and seeking professional advice when necessary, you can help ensure that your retirement is financially secure and comfortable.
Looking at maximising your pension? Get in touch with us today.
Note:
- The value of your investment may go down as well as up. You may not get back what you initially invested.