Retirement Income

Do you know what your income is going to be?

Making a financial success of retirement takes planning and part of this is knowing what income you can expect when you retire. Retirement income often comes from a number of sources and so you may find it useful to look at the areas below in looking at your future income.

State pension - the State pension scheme is made up of the basic State pension, which is payable to the majority of people resident in the UK and top up schemes (SERPS and S2P) which are specifically for employees. The Pension Service at the Department of Works and Pensions can give you a projection and the start date for your State pension.

Other pensions - with private pensions your pension providers will be able to give you projections of fund values at your planned retirement date. You will then be able to get an idea of the possible income you could have when you purchase an annuity with your pension fund (see Type of annuity below).

If you are in an employer's scheme the trustees will be able to give you income projections.

Savings and investments - you may want to look at the income that can be generated from savings and investments. It is important to have a balance between money on deposit and other investments which have the potential to provide income and capital growth. You need to be aware of the effects of inflation as this can soon erode the purchasing power of your money.

Topping up your existing pension to take advantage of the tax relief available is well worth considering. The new pension regulations, which came in on A Day, allow you to contribute up to100% of your income or £3,600, whichever is higher, in any year. There is annual allowance on which tax relief is available (£235,000 in the tax year 2008/9).  If you are in an employer's scheme it may be possible to buy extra years which will boost your retirement income.

You may be relying on your property to provide an income in retirement. You might want to check that you have set this up in the most efficient way. 

Pension considerations

With a pension fund it is important to understand the options that are open to you. If you have a company final salary pension some of these options may not apply. Your pension trustees should give you full details of the choices. 

Tax free cash

You have the option of taking 25% of your pension as a tax free lump sum. The lump sum may come in very useful at a time when your lifestyle is changing but it will reduce the size of the fund to buy an annuity. This in turn will reduce the income available to you.

Type of annuity

If you decide that you need to take income from your pension fund, the most secure way of doing this is to purchase an annuity. This means exchanging your fund for a guaranteed income. Purchasing an annuity is a one off decision and you cannot change your mind.
 There are many choices with an annuity. For instance, you could take a level or increasing payment,  provide a guaranteed income for a period even if you die or provide an income for a spouse if you die first. You could buy a combination of annuities - maybe an increasing income with one and a higher level income with the other.
With such an important decision you may want to take advice.

Open Market Option

You don't have to buy an annuity from your pension provider but can take advantage of what is known as the Open Market Option (OMO). This means that you can take your pension fund and purchase an annuity from the company which will provide the highest income. Annuity rates do differ from company to company and the Open Market Option could make a significant difference to your retirement income.

Unsecured pension

You don't have to purchase an annuity on retirement but can leave your fund invested and draw an income. There are minimum (currently £0) and maximum amounts you can draw and these are set out by the government.
This is a riskier option than purchasing an annuity because your fund will still be subject to the investment risk. If there is a setback in the market, it is possible that your pension fund could shrink and your income reduce.

State pension

With the State Pension you have the option of taking the pension at your retirement date or deferring payment by 5 years in exchange for a lump sum or a higher income later on. The DWP Pensions Service will be able to give you further details.

Estate planning

You may well be paying less income tax in retirement but the government has a final tax in store for you - Inheritance Tax (IHT). Please see our web page devoted to the tax.

When you have assessed what money you think you will need in retirement you might want to consider gifting assets to avoid IHT. You can give away an amount annually without attracting IHT and gifts out of income (not out of capital) are also exempt. Further details are on our IHT page.

This information is based on our current understanding of inland revenue taxation rules. Taxation levels, bases and reliefs are subject to change.