More than three-quarters withdrew cash from their pensions before retirement age, an average of £47,000, according to new insights from Scottish Widows. With your pension, you can pay off your debts, provide for your family, and increase your purchasing power. However, it can also cause problems for you later in life.
At age 55, your pension may last 30 years or more, so plan those retirements carefully.
Saving a pension giant enough to do so is hard enough. Figuring out how to make it last is even harder.
Stephen Lowe, director of pensions specialist Just Group, likens it to flying a plane without knowing the weather conditions or the final destination. “You have no idea how long you’ll live, how the stock markets will go, or how inflation will erode. your purchasing power. “
It was less difficult in the days of end-of-stay payments and guaranteed annuity schemes, when your pension source of income lasted as long as you did.
Most pensions are now invested in the stock market, with all the dangers on their shoulders, Lowe said. “Money withdrawn early cannot be recovered later. Economic volatility can derail the most practical plan.
At least the state pension is guaranteed, and Lowe recommended it with a guaranteed annuity or a pension with perks, to cover essential expenses. “Save the rest for treats, luxuries, vacations, and gifts, or just let it grow. “
While there is a danger of running away with too much cash, there is a danger of spending too little. “His pension was the cash he stored up to keep him comfortable during his retirement. Don’t skimp or hoard, unless necessary.
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People tend to live longer than expected, so let’s assume they’ll live into their 90s or 100s, said Becky O’Connor, director of public affairs at PensionBee.
“A crude and conservative strategy would be to divide your kitten’s length, minus the tax-free lump sum of 25 per cent, by the number of years your retirement will last. “
So if your pension is worth £100,000 and you get £25,000 tax-free, you’re left with £75,000. If you’re 65 and thinking about turning 85, you can safely withdraw £3,750 a year.
In practice, it’s possible that more will be accepted, O’Connor added. “Pensions that remain in the background are expected to continue to grow, so we get figures higher than this conservative estimate. “
Some use the “four percent rule,” also known as the “safe withdrawal rate. “This rule of thumb for money planning suggests that if you collect this percentage of your pension each year, your cash will last for 30 years or more.
I’ve written more about it here.
Remember, high rates can erode your pension, so be sure to pay no more than 1% a year, O’Connor said.
Today, most people leave their pension invested and receive lump sums or income deductions, although annuity sales have resumed as interest rates rise.
A combination of the two may be more effective, O’Connor said. Use early retirement withdrawals to increase your pension and then buy an annuity when you’re older when you get more sources of income because your life expectancy is shorter.
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Andrew Tully, chief technical officer at Nucleus Financial, said if you need your retirement savings to last a lifetime, check back periodically, at least once a year.
But don’t overdo it. The price of your pension will rise and fall with the stock market, and obsessively checking its price can lead to panic when inventories fall or excitement when they rise.
If possible, make withdrawals after a fall, as this will crystallize your losses and prevent you from recovering. “Take the source of income from less volatile funds, or keep a small amount of money and withdraw the source of income from it. “
You don’t want to withdraw all of your tax-free cash at once, but you can withdraw it over several years, Tully said. “If your kitten grows, it will increase your tax-free sum. “
It’s helpful to have other sources of income like a part-time job, savings, Isas, premium bonds, or even a rental property. Many other people prefer to use them first, as they are not used because they would possibly be subject to inheritance tax in the event of death, while the unused pension is not.
Tully said you should also make sure you qualify for the maximum state pension and claim National Insurance credits if you’re eligible or make voluntary contributions if you’re headed for a deficit.
Consider independent money counseling. Those over the age of 50 make an informal appointment with the independent government support service Pension Wise. Retirement freedoms are incredibly popular, but they will need to be monitored with caution.
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