A recent report suggests that retirees who have accessed pension funds via “flexible” options before their normal retirement date could have missed out on a collective £2 billion in potential returns.
The research concluded that around 555,000 people who withdrew their full pension between April 2015 and March 2020 put their pot into a cash account or similar arrangement. With interest rates low, their fund has effectively been losing value against inflation, rather than benefiting from potential returns by remaining invested.
The impact of inflation is only one reason why you might decide not to retire early. Here are three more.
1. Your money will have to last longer
Recent Office for National Statistics (ONS) figures confirm that life expectancy is around 80 years old for men and 83 for females.
As we saw when we looked at planning for a 100-year life, a woman aged 50 today has a 7% chance of making it to 100, rising to 8.8% for a 40-year-old woman.
Retiring at the current minimum retirement age of 55 (rising to 57 in 2028) could mean your retirement pot has to last you for another 30 or even 40 years.
Budgeting effectively for that amount of time – while factoring in unknowns like the cost of potential later-life care – could prove tricky.
When we put a retirement plan in place for our clients it is based on their retirement goals and the lifestyle they want to live in retirement. An extra 10 years or more of investment could make a huge difference to your overall pot and the lifestyle you can maintain.
If you are thinking about retiring earlier be sure to speak to us before making such an important decision.
2. You could limit your future contributions
Taking your pension using certain Pension Freedoms options could result in you triggering the Money Purchase Annual Allowance (MPAA). This can severely limit the tax-efficient contributions you can make to other pensions you hold.
The Annual Allowance is the amount that you can contribute to your pension during the tax year while still receiving tax relief. For the 2021/22 tax year, it stands at £40,000 or 100% of your annual earnings if lower.
Accessing your funds using certain Pension Freedoms options will trigger the MPAA, lowering your allowance to £4,000.
If you are looking to access some funds early while continuing to contribute tax-efficiently into other pensions you hold, you will need to bear the MPAA in mind.
It is possible that as a high earner, a lower Annual Allowance may already apply.
If you are worried that your chosen pension might trigger the MPAA, or you are unsure which allowance applies to you, get in touch and we can help.
3. Leaving your pension until last could be a tax-efficient way to pass wealth onto the next generation
Under current rules for the 2021/22 tax year, the money you take out of your pension becomes liable for Inheritance Tax (IHT). Unused pension funds, on the other hand, do not form part of your estate and are, therefore, not included in IHT calculations.
This means that unused pension funds can be a tax-efficient way to pass wealth onto the next generation in some circumstances.
If you die before age 75, your unused funds can be passed on to a chosen beneficiary. This will normally be tax-free.
You can still pass your unused pension funds on if you die after the age of 75, but your beneficiary will be liable to Income Tax at their marginal rate.
You will need to select your pension beneficiary through your pension provider, rather than noting it in your will. Be sure to check who you have listed, if anyone, and ask for an Expression of Wish form to add or update a beneficiary.
If you have savings and investments to draw on during retirement you might try to keep your pensions untouched or leave one pension set aside specifically for this purpose.
Get in touch
Once you have a retirement plan in place, it needn’t change unless your long-term goals do.
Taking a plan earlier than you originally intended could have unforeseen consequences. Not only could your pension lose value when measured against inflation, but you will need to budget for longer, potentially decrease your future contributions, and forgo the chance to pass on unused pension wealth tax-efficiently.
If you are concerned about any aspect of your future retirement plans, please contact us to find out what our Chartered Financial Planners can do for you, or to book in your regular review.
Please note
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
