What to do before you take money out of your pension

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If you’re going to take money out of your pension, you may end up paying too much tax, too much in charges or just taking out more money than you need. Find out what to do before you take money out of your pension.

What to do before you take money out of your pension

If you have a pension ‘pot’ type of pension, rather than one that’s linked to your salary, you can take money out of it once you’ve reached 55. You can take out small amounts as and when you need it, or you can take out a large lump sum. A recent report by the regulator, the Financial Conduct Authority, found that some people were paying too much in charges, while others were losing out by putting their money into savings accounts rather than investing it.

Here are six things you should do before you take money out of your pension.

Step 1: Work out how much you’ll need to live on

If you don’t work out what you need to live on, you won’t know how much you’ll need to take from your pensions. The amount you need to live on is likely to be less (and could be much less) than you’ve been living on while you’ve been working.

You may find that once you’ve looked at how much you have in your pension(s) you have to cut back on your planned spending. Or you may be able to afford to live it up more than you expected! Either way, your starting point should be to work out what you need.

Step 2: Find out what you will have to retire on

Get a state pension statement. You can do this on the Gov.uk website by following this link.  Next, find out how much you might get from your workplace pension(s) and any private pensions you have. If you’ve lost track of pensions from jobs you had some time ago, it should be possible to find them again. You can read how to do this in my article called Finding a lost pension plan.

Step 3. Get free help from Pension Wise

Pension Wise is a government-funded service that can give free ‘guidance’ about pensions and retirement options if you’re aged 55 or over. It doesn’t offer financial advice, so it can’t recommend individual products or tell you the best course of action for you.

However, it can help you make sense of what you have at the moment and explain what the options are. It can also tell you some of the pros and cons of a particular option – such as cashing in a larger chunk of your pension versus keeping more of it where it is. You can read more about how Pension Wise works in my article

SAVVY TIP: Be warned! If you type ‘pension wise’ into Google the names that are at the top of the listings may not be Pension Wise, but commercial companies that pay to appear at the top of the search results. Always check before you click. Pension Wise will never call you out of the blue, so if a company does this and claims to be Pension Wise, it’s lying.

Step 4: Talk to an independent financial adviser

Most people take money out of their pension without taking professional advice. It’s true that you’ll have to pay for any advice you get from a financial planner or independent financial adviser, but it could be a really good investment.

SAVVY TIP: The Financial Conduct Authority (FCA) found in its recent report that 60% of people who didn’t take financial advice before transferring their pension into something called ‘drawdown’ (it’s basically a pension that lets you take an income directly from it), didn’t know where their money was invested. A third of consumers had put their pension money into cash and the FCA estimates that half of those could be losing out in terms of the income they’re getting in retirement.

There are several ways you can find an independent financial adviser. We have a number of financial planners listed on our SavvyWoman Directory. Alternatively, you can check out websites such as Unbiased or Vouchedfor. These are all free to use.

FULL DISCLOSURE: Companies pay SavvyWoman a flat rate monthly fee to be listed in our directory. That money helps to keep the site free to use. However, the companies don’t pay us if you click on their link or sign up with them, which is how several IFA directory/listings sites work.

Step 5: Don’t ignore tax!

When you take money out of your pension, only the first 25% is tax free. You’ll pay tax on the rest. You might be tempted to take out money, but if you take out more than you need, you could pay (a lot of) tax on it.

And if you take out a lump sum directly from your pension, you may be taxed at what’s called the emergency rate. That’s because HM Revenue and Customs will assume you’ll take out the same amount as your first withdrawal every month. You can claim back the extra tax you’ve paid, but it could take some time to do.

SAVVY TIP: I’ve written a guide to claiming back the extra tax you’ve paid when you take money out of your pension. You can read the article in full here.

Step 6. Watch out for the charges

The FCA report found that people who took out an income drawdown pension paid between 0.4% and 1.6% in charges (blimey – that’s a huge difference). The FCA also found that the way the charges were set out meant it was difficult for people to compare them. Always ask the pension drawdown company or the financial adviser (if you’re taking advice) exactly how much you’ll be charged.

Related articles: 

How to avoid retiring on £23 a day

The SavvyWoman Podcast 17- Pensions and the self-employed – all you need to know with Kate Smith from Aegon

SIPP v SSAS pensions; if you have your own business, which pension is best?

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