State pensioners have been issued an urgent warning – because they could ‘run out of money’ in retirement due to one small detail in their pension planning.
It’s something we’re all doing every month, putting money into our pension pot through work (unless you opt out of your company pension, which is generally a bad idea).
But when it comes to retirement, there’s a mistake you can make which could prove extremely costly and even cause you to run out of money in old age, says Rowan Harding, financial planner at Path Financial.
The issue surrounds pension withdrawals and tax. Usually, everyone is entitled to take 25% out of their private pension pot when they retire, without paying tax on it.
But if you take a large sum out too early, you could risk not having enough to cover your retirement.
She says: “When you’re approaching retirement, you will have to decide when and how much of your pot you should take. This will have big ramifications in terms of what you’ll get and how long that cash will last.
“There is a minimum age, currently 55, when you’ll be able to take some or all of your pension money. But accessing your pension too early may not be sustainable in the long term. It takes careful planning to understand when, how and what when it comes to taking your pension.
“While taking more from your pension pot early on could work for some, for example those who have a serious illness and need the funds to pay for treatment, the key aspect of pensions is that they are sustainable. Your pension is meant to last. As financial advisers, the most common question we get about pensions is ‘have I got enough in it?’”
In most cases, people will only get 25 percent tax-free on defined contribution pensions, after which you will be liable to Income Tax on any earned income after you’ve been paid £12,570, which is the current Personal Allowance and has been fixed since 2021/2022. The amount of Income Tax you’ll pay depends on how much income you get above the Personal Allowance.
If you also get the full new State Pension, you will not pay tax on that unless the Triple Lock increases the total beyond the Personal Allowance threshold in future, but it will count towards your Personal Allowance and use up most of it right now.
So if you receive income from a defined contribution pension, your first 25 percent will be tax-free, and you will then pay tax on anything above £1,067 as the full State Pension adds up to £11,502.40.
So not only could you risk running out of money down the line, but you could open yourself up to paying tax right now thanks to your withdrawal being added to your state pension in a given tax year and pushing you over the threshold.
Rowan adds: “Remember, planning now to make sure you are saving enough for your future, knowing when and how to take your pension or if leaving the pension pot to continue growing is best for you, is always worth checking with an expert Financial Planner.”
One other aspect of pension planning is about what you’re investing in, and how it might affect the world you leave for your grandchildren.
David MacDonald, founder of Path Financial, adds: “Most people are unaware that you can move your pension, so it aligns more with your ethics, and that should be what people are considering as well as how much is in it.”
This comes after a new poll from Path revealed 85% of UK grandparents are concerned about the world their grandchildren will inherit.
David encourages people to think about switching to more eco-friendly investment pots as these can make a big difference for the planet, adding “the more people keep saving into green pensions the better”.
