Taking a larger slice of your pension pot may be a wise move

You already know that accumulating enough savings for a decent pension is crucial. But is it not equally crucial to draw on the wealth you have built up for a comfortable retirement? The answer…

Taking a larger slice of your pension pot may be a wise move

You already know that accumulating enough savings for a decent pension is crucial. But is it not equally crucial to draw on the wealth you have built up for a comfortable retirement?

The answer to this question is widely debated. On the one hand, superannuation is supposed to “turn workers into millionaires”, as National Employment Savings Trusts (Nest) chairman Adrian Leyshon declared on the Today programme last week. But how many of the three million pensioners now topping up their pension with extra contributions have a pot worth even £250,000, let alone £500,000 or £1m?

In any case, what of that lazy notion that people should save until they drop? There is some truth in the old saying “when you’re dead you’ll still owe us”. But even if you don’t want to splash out on an offshore tax haven or – heaven forbid – a second home in the Isle of Man, experts are advising that if you hope to live into your 90s – or beyond – and need to make some kind of income or savings plans, then taking an ever greater chunk out of your pension savings may not be a bad idea.

Top talent: David Tyrie, chairman of the influential Treasury select committee. Photograph: Graham Turner for the Guardian

Indeed, experts at financial advisory firm Vantage Hove argue that it is essential to take full advantage of the tax breaks to make the most of today’s enhanced personal allowance. These two changes are making tax relief on pension contributions more valuable than ever before, according to Vantage. Under the previous system, “real” pension savers might have pocketed just an extra £900 a year. “But the new personal allowance means a typical five-person household would now be eligible for tax relief on any pension contributions at between £2,000 and £8,000 per year,” says the firm.

If it all seems too much to deal with, then perhaps a cheaper alternative to lavish pension contributions is buying an annuity. Annuities offer a guaranteed income for life from a life insurance policy, paid out for as long as you live. Nowadays, annuities can pay out as little as 2% a year. When they were offered at 4%, they were extremely popular.

So why is it that the pension industry has been left with more than a few quids’ worth of annuity profit after slashing the rates paid out by massive margins – up to 75% – to encourage savers to take their retirement savings on to an annuity.

Firms such as Aegon, Prudential and Royal London hit the headlines in 2016 when they were fined £22.5m and £4.7m, respectively, for manipulating annuity rates in order to push up their profit. It was the last time they were fined in this way for cutting premiums on annuities, and they were criticised for it again at a recent pensions watchdog inquiry for handing out “false” pensions advice.

Meanwhile, expert figures show that one in four women are not taking advantage of the state pension trap, which means they are missing out on benefits such as the state second pension of £10.25 a week and the additional state pension of £125.95 a week. More than four million of these women could be missing out on a total of more than £5bn a year.

Still, it is more than an interminable wait before a pension begins when you reach retirement age. You may be able to work until your 70s or even 80s, so it is no bad idea to dip into your pension pot as you get older.

One of the most daunting problems with retirement planning is simply not knowing how to spend your savings. Once you have a solid idea of what you are saving for, and then also a firm idea of how much you will need to cover essentials like health costs, food and housing and travel costs, then you can try to get a handle on how many years it will take to cover these costs. As Alan Higham, the former chief actuary at the Prudential, says: “There is no perfect formula, but you can make a sense of your spending needs over the years in order to give yourself the flexibility to live a lifestyle which you desire.”

Leave a Comment