After more than three decades advising readers about pensions, one personal finance journalist is faced with decisions about her own plans for later life.
After more than 30 years advising readers about their investments, savings and pensions, I now find myself having to take my own advice. Early next year, I plan to wind down my journalism and start drawing my pension.
That raises all sorts of questions:
- How should I take the benefits? Cash lump sum or not?
- How long do I need the funds to last and, therefore, how much can I withdraw each month or year?
- Which is the best pensions vehicle to use?
- Whom should I turn to for advice?
Of course, I have my own thoughts on how to answer these questions – and none of these involve taking out an annuity or buying a Lamborghini. I don’t want to buy a guaranteed income from an insurance firm and I won’t use the pension freedoms to withdraw a big lump sum to spend on a fancy car.
Heather Connon plans to cut down her writing and start drawing her pension
But there is a lot at stake: get it right and I could enjoy a comfortable old age; get it wrong and I could run out of money. I have, therefore, decided to approach the process as a novice and to seek a wide range of views on the best approach for me.
Baby-boomer advantages
I am in a very fortunate position. While I don’t have a final salary scheme with a guaranteed, inflation-linked pension for life, I have many of the other baby-boomer advantages.
For much of my journalism career, I worked for companies that paid a generous 10% of salary into my pension if I made the maximum 15% contribution.
Compare that with the auto-enrolment workplace pension, where the minimum employer contribution will rise to just 3% in 2019, when the employee’s minimum will be a meagre 4%.
Lower house prices in the late 1980s, when my pension saving started, meant I could afford to make the maximum contribution and still pay my mortgage. I was also late starting a family, so my career was well established when I had my first child and I was able to work flexibly §with no impact on my earnings, so I could finance childcare costs and pension contributions without too much hardship.
The start of my pension savings also coincided with a stock market bull run – the FTSE 100 Index of the largest companies on the London Stock Exchange roughly trebled in the 1990s.
While this century has been a bit more mixed, it set my retirement savings on a very solid foundation, so I now have a pot of around £500,000 which, even though I will be only 58 when I retire, should be enough to provide me with a reasonable income.
Pension valuation
My first step was to contact my three pension providers to ask for a valuation. My largest fund is with Guardian Media Group, and the pension department was helpful in explaining my options following pension freedoms but warned that it did not offer the income drawdown option, which was likely to be my preferred choice.
Income drawdown is a way of using your pension pot to provide you with a regular retirement income by reinvesting it in funds specifically designed and managed for this purpose. The income you receive will vary depending on the fund’s performance. It isn’t guaranteed for life.
A valuation arrived promptly, together with a useful Pension Wise booklet explaining my options, how to contact the service and advice on avoiding scams. Friends Provident, part of Aviva, manages my second largest pot.
When I explained to the customer services representative that I was thinking of taking my pension via drawdown, he explained that while Friends itself does not offer that option, Aviva does – omitting to mention that numerous other companies do too.
The third and smallest fund is with Standard Life, where I had to try on three different occasions to get through to a representative; when I did, they simply pointed me to the company’s online portal where I got an up-to-date valuation.
Pension Wise
My next step was to contact Pension Wise, the government’s free advisory service, which was established to guide people through the pension reforms introduced in 2015, which allow savers far greater freedom in how they can take their pension benefits.
Anyone can ask for a 45-minute appointment to discuss the options available, either by phone via Pension Wise or face to face at a local Citizens Advice Bureau.
Making a telephone appointment was straightforward, and slots were available within three days.
Sally, my Pension Wise adviser, made it clear from the outset that she would not give me financial advice nor recommend any product.
She started by taking details of my age, pension savings, debts and other income and what I wanted to achieve in retirement. She outlined the six options available:
- leave the fund untouched;
- use all or part of it to buy an annuity;
- take an adjustable income – which she said was called flexi-access drawdown – drawing up to 25% as a taxfree lump sum and leaving the rest to take as income when required;
- take out cash in chunks, in which case 25% of each withdrawal would be tax-free;
- take it all out in one go; or
- a mixture of all five.
She then gave more detail of each option, starting with the third, adjustable income, and moving on to the fourth, taking cash in chunks. This was sensible, as they are the two most likely options for someone with a pot of my size.
Sally gave me basic tax advice, discussed whether I would like to leave some of my pot to my family when I die and how that would be taxed if I did so, depending on my age.
She also clarified for me that, although I have three pots, I could not cash in one of them and treat it as the 25% lump sum for the whole lot; the 25% limit applies to each of the three funds.
She asked basic health questions and pointed out that some annuity providers offer better terms for those with health problems (I was a smoker, though I gave up more than 20 years ago). And she warned of the risk of scammers and how to avoid them.
Sally advised checking with the providers that there were no guarantees I could lose if I took my pension early.
I am financially literate and know a considerable amount about pensions, but I believe that the interview would have been useful for those with less knowledge.
Sally was able to explain complicated terms and set out the options clearly. She also sent me a fairly generic follow-up report outlining the options we had discussed.
She then advised on the next step: to consult a financial adviser or to approach pension product providers directly to discuss my options in more detail. These next stages on my pension journey will be dealt with in future diary updates.
Things to do before you start planning a drawdown
Contact your employer or other pension manager
Ask for the following:
- Confirmation that your pension pot is a money purchase or defined contribution scheme. Pension freedoms only apply to these types of schemes, not to final salary schemes, also known as defined benefit pensions. While the government’s reforms have allowed people with the former to transfer their funds to a money purchase scheme to take advantage of pension freedoms, this may not be in your best interests. You should always seek independent professional advice before making any such a move.
- An up-to-date valuation of your fund. This is essential information for anyone advising on the options for taking your pension.
- Clarification as to whether there are any guarantees or other special provisions attached to your pension, which you could lose if you retire before your due date.
Contact The Pension Service to get a forecast of your state pension
You may need less income from your private pension when you reach state pension age and receive your state pension, and you may also want to consider making additional‑national insurance‑contributions if you won’t meet the requirement of 35 qualifying years for a full state pension.
Draw up a retirement plan
This should include:
- An analysis of your expected living expenses in retirement. Your monthly pension income will need to be large enough to cover these.
- Any plans for one-off expenses on retirement – for example, to finance a holiday, a house refurbishment or a new car.
- Based on the above, an assessment of whether you will want to take a lump sum from your pension and, if so, whether you will take the full 25% you are entitled to or a smaller amount.
- Other income and assets – including, for example, individual savings accounts (Isas) and other savings, rental property, income from part-time work and a partner’s income or pension – which will help to finance your retirement.
Useful contacts
To check your state pension,‑apply online at Gov. uk/check-statepension ‑or call 0345 3000 168. PensionWise:
To book a face-to-face appointment at your local Citizens Advice Bureau or a telephone appointment, visit Pensionwise.gov. uk or call 0800 138 3944.
Heather Connon is a freelance financial journalist who writes for The Guardian, The Observer and The Independent. This article first appeared in our sister magazine, Money Observer.
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