Can you afford to realise travelling dreams with your pension?

Are you dreaming of getting away and exploring new destinations when you retire? Or perhaps you want to go back to that place where you were able to unwind? When asked what workers hope to do more of in retirement, travelling is a common theme. It’s easy to see why. Getting away from your usual routine as you start the next chapter can certainly be appealing.

In fact, a report from Aviva found 47% of survey participants said travelling more was something they wanted to do when retired. This is complemented by 15% wanting to buy a holiday home and the same hoping to move abroad. If it’s a retirement dream you share, affordability is a key question to consider.

How much will your retirement plans cost?

The first thing to do here is to calculate the cost of your travel plans.

Are you hoping for a few weeks away in luxury? Or is an extended trip that takes you through numerous countries what you had in mind? Planning your travel costs, from accommodation to the experiences you want, is essential for assessing if it’s affordable.

This is an opportunity to think big and design the dream trip you’ve been looking forward to. If there are things you’ve always wanted to do, from flying in a hot air balloon to hiking through Yosemite, now is a perfect time to start looking at how they could fit into your wider plans. Writing down a bucket list can help focus your efforts on the experiences you really want.

With these figures in place, you’ll be able to understand if it’s affordable. Your pension savings, other assets and retirement lifestyle will all play a role.

When can you access your pension?

If you’re hoping to use pension savings to fund travelling, you’ll need to know when you can access it.

If you have a Defined Benefit (DB) pension, this will depend on your individual scheme. Check the terms of your DB scheme, it will provide a specific age when you can begin receiving a pension. DB pensions typically pay out regular sums for the rest of your life. However, some will also provide a lump sum at retirement or you may be able to reduce the annual income in return for an initial lump sum. If you’re hoping to pay for a holiday from your pension, a lump sum can be useful. But make sure you understand how this will affect your income long term.

With a Defined Contribution (DC) pension, you’ll usually be able to access your savings from the age of 55. Typically, you can take a 25% tax-free lump sum. Withdrawals exceeding 25% are likely to be liable for Income Tax. This flexibility could allow you to realise travelling dreams in a tax-efficient way. The first question to consider is whether the potential lump sum withdrawal is enough to explore the world.

When you can access your pension is a vital part of whether travelling is feasible. However, it’s just one part of the calculation.

Would taking a pension lump sum harm your financial security?

The good news is that many people we speak to are in a better position at the point of retirement than they believe. But looking at the long-term impact is essential.

It’s a process that can give you confidence as you make travel plans. Knowing your future would still be financially secure means you get to make the most out of your trip with complete peace of mind. You may even find you can afford to take more out of your pension than you had initially planned.

Taking a lump sum out of your pension when you first retire will mean having less to fund your lifestyle for the rest of your life. So, whilst working out if it’s affordable, there are two vital areas to think about:

  • Life expectancy: How long does your pension need to last for? No one wants to think about passing away. However, it’s a crucial question when calculating whether you have enough saved in your pension. Between 2016/18 the average life expectancy across the UK was 79.3 for men and 82.9 for women. But many people will live longer than the average. It’s also worth noting that it’s more common to underestimate how long you’ll live for. Doing so could mean you run out of money in later retirement. If you have a DB pension, your income is guaranteed for life, as a result, life expectancy may not be an issue.
  • Retirement lifestyle: Next, how much do you need annually to create the retirement lifestyle you want? It can be tempting to focus on the big areas, such as the one-off travelling trip you hope to plan. But the day-to-day is just as important. You need to ensure your pension will cover essentials, such as utility bills, as well as some luxuries. Thinking about the lifestyle you hope to enjoy can help come up with a sum you need in your pension.

It can be difficult to understand the long-term impact of taking a lump sum out of your pension at the point of retirement. This is where we can help. We can model how your wealth will change over time depending on the financial decisions you make, including taking out a lump sum to travel. To find out more, please contact us.

Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.