There are more options than ever to choose from when it comes to using your retirement savings.
You can swap some or all of them for a guaranteed income for life by buying an annuity, you can keep your pension pot where it is and withdraw money in lump sums, you can take income flexibly using Drawdown - or you can mix and match any of these options together. There’s a full explanation of retirement income options here.
Even if you settle on a course of action you know suits you, there may be further questions about how to invest your pension money until you need it, about how much income to take to ensure your money lasts as long as you need it to and about how to do all this in the most tax-efficient way possible.
Using a professional adviser to get these questions right can make sense for many - but advice comes at a price. Do you need to take professional advice to decide your retirement plan? Is it worth the money?
Here’s six questions to ask yourself before deciding. Even if you feel you need advice, you may benefit from the Government’s Pension Wise service which offers free, impartial guidance to help you understand your options at retirement. You can access the guidance online at www.pensionwise.gov.uk or over the telephone on 0800 138 3944.
Do you want to access a ‘Defined Benefit’ pension?
Defined Benefit schemes pay a retirement income based on your salary and how long you have worked for your employer.
The income is guaranteed but there are limited options to access your pension, except as an income. Many Defined Benefit schemes will allow you to take a tax-free lump sum, but what you’re able to get, and when, comes down to the scheme’s rules.
If you want to access the money in a different way you may have to transfer your scheme to a Defined Contribution pension that offers fully flexible access. Anyone with a pension pot worth more than £30,000 is required to take financial advice - it is not voluntary. There are good reasons for this. The guaranteed income provided by Defined Benefit schemes is very valuable and hard to replace, and it may come with other benefits that would be a mistake to give up.
As such, it may be that the advice recommends that you don’t transfer your pension at all. This could be for a variety of reasons, and could be because there are other ways of providing a similar outcome rather than transferring. You may still be able to transfer and go against the advice, but the adviser may not be willing to facilitate this and the new pension scheme you wish to transfer to could refuse if you have not received a positive recommendation to transfer.
Are you confident navigating the tax system?
Much of the value that a financial adviser can add concerns tax, and minimising the income tax you pay on money withdrawn from a pension.
At age 55 you can potentially access a Defined Contribution pension flexibly, including 25% of the value which is tax-free. However, this is just one of various ways to take cash sums, and it may not be obvious straightaway which is best.
For example, if you earn less than the “Personal Allowance” for income tax - this is an amount we can all earn without paying tax - then it could be better to make withdrawals that are partly subject to tax, up to that Personal Allowance. You can then keep your tax-free cash for another occasion.
Conversely, you may not want to take taxed pension income if it means you’ll be pushed into a higher tax bracket. Here it might work out better to take tax-free cash or use other savings, such as ISAs.
By making the most of free guidance, including the Pension Wise service, it is certainly possible to learn what you need to make these decisions for yourself. For some, however, they may be more comfortable using an adviser.
Are you at the limit of pension saving?
Some of the most difficult-to-understand pension rules concern the Lifetime Allowance - the total you can hold inside pensions with tax relief applying. The Lifetime Allowance now is £1.03m but some people may have higher limits thanks to a legacy of rule changes over the years.
If you hold more than this - because you’ve contributed more or because investments have grown - then there could be a tax charge of up to 55% to pay. It gets complicated because the test for whether this charge is due is only triggered at certain points.
A skilled adviser will know the rules inside out and can reduce the risk of a nasty tax charge. If your total pension assets take you close to the Lifetime Allowance, you’re among the most likely to benefit from financial advice.
Are you confident investing money?
Unless you use all your pension pot to buy an annuity, some will remain inside a pension and invested in assets like stocks and shares.
A financial adviser can provide an investment plan tailored to your needs and appropriate to your appetite for risk, and you may prefer this personal touch. If you are using Drawdown to provide a pension income, the adviser can help choose investments to provide the income you need, and will monitor the level of income being paid to you to help ensure it remains sustainable.
If you don’t want to pay for advice you can still use guidance tools to achieve these things, but it will be up to you to keep on top of investment and withdrawal levels.
Is the cost of advice worth it?
Advice is only worth it if it adds more value - whether that’s in monetary terms or simply peace of mind - than it costs to provide - so how much is that? Prices and pricing models will vary. Some firms will charge a percentage of the value if the customer goes ahead with the advice, and nothing if not. A percentage fee can work out to be much higher than a flat fee if your pot is large, so ensure you know the fees that apply in your case.
Do you want recourse to an ombudsman if things go wrong?
If you do pay for financial advice, the adviser has a duty to ensure their recommendations are suitable for you, including that the investments suit the risk you are willing to take. If things go wrong and you feel their recommendations were not suitable, you may have recourse to the Financial Ombudsman Service which can decide on individual cases and order a firm to pay you recompense if they agree you have be misadvised.
That doesn’t mean you get money back from losing investments, only in cases where the recommendation was not suitable for you, based on the information obtained by the adviser.
No such recourse exists if you take retirement decisions for yourself.
The value of investments and the income from them can go down as well as up, so you may not get back what you invest. This information does not constitute investment advice and should not be used as the basis for any investment decision nor should it be treated as a recommendation for any investment or action. You should regularly review your investment objectives and choices and if you are unsure whether an investment is suitable for you, you should contact an authorised financial adviser.