A common perception of pensions is that they are complicated and difficult to understand.

It’s hardly surprising when you consider that financial planners must pass gruelling examinations to advise clients on their retirement funds. Furthermore, they then have to undergo continuous professional development to demonstrate they have kept up to date with any changes in pension regulations.

Quite right, too, considering we are talking about a pot of money you could be living off for the next two or three decades! Despite this, a recent article by Money Age shows that just 14% of retirees over 55 took regulated advice or guidance before retiring or switching on an income from their pension.

Not speaking to a financial planner before drawing pension income could harm your retirement plans and result in unnecessary taxes. These could jeopardise your lifestyle in later life or, even worse, result in your pension running out early.

So, read on to discover three reasons it makes sense to speak to a financial planner before retiring.

1. A financial planner could confirm whether you can afford to stop working

Visiting your pension regularly in the years leading up to your retirement is a good habit to get into. You can ensure your retirement fund will provide the lifestyle you want and, if it won’t, work with a financial planner to understand how you could get it back on track.

When you reach your planned retirement age, a planner can provide you with further, equally essential, advice. For example, they could use income modelling software to confirm how much income your pension could provide and how long it might last, and whether a flexible income or an annuity might be best.

An annuity is where you buy a guaranteed income for life.

If your pension cannot provide the level of income you’d hoped for, a planner can provide you with options. This might be to consider retiring later, continuing to work part-time or adjusting your standard of living in retirement.

2. A planner can help you inflation-proof your pension pot

Inflation is the rising price of goods and services, which has the potential to devalue your pension over the long term.

The Bank of England (BOE) reveals that you’d have needed £131 in 2020 to have the same spending power as £100 in 2010, due to an average inflation rate of 2.7% a year during the period. Your pension would have had to have grown by 31% to keep up with inflation in the decade to 2020.

If it hasn’t, your pension will have reduced in value in real terms.

As you reach retirement, a financial planner can confirm whether your pension pot has enough protection against inflation, and what the affect could be on your income.

For example, many pension providers reduce the risk level of your pension as you approach retirement age.

While on the face of it this may seem sensible, it could reduce the growth potential of your pension, which may devalue it in real terms. A financial planner will help ensure you have the right amount of growth potential to help inflation-proof your retirement fund, while maintaining a level of risk that’s right for you.

3. A planner will make sure your retirement is as tax-efficient as possible

Speaking with a financial planner could not only stop you paying more tax on your pension income than is necessary, it could also help reduce the amount of Income Tax you pay. Here are five ways this might be achieved:

• Taking income tax-efficiently: a key role of a financial planner is to help avoid paying unnecessarily high amounts of tax. One way this could be done when you reach retirement is to ensure you do not take large lump sums from your pot that might push you into a higher tax bracket.
• Uncrystallised funds pension lump sum (UFPLS): a financial planner could help you use this little-known option to significantly reduce, or negate, your Income Tax liability in retirement. While it might mean you don’t take your tax-free lump sum, it could be a more tax-efficient option for you.
• Money Purchase Annual Allowance (MPAA): This little-known tax trap could affect you if you intend to work part-time while taking an income from your pension. If you are caught by the regulation, your Annual Allowance will be slashed from £40,000 to £4,000 (2021/22 tax year). The Annual Allowance is the amount you can contribute to your pension and still receive tax relief.
• Lifetime Allowance: if you have a pension pot worth more than the current allowance of £1,073,100, you may trigger a hefty tax charge if you try to access the amount threshold. If you take the money as a lump sum, you could be liable to an eye-watering 55% tax liability on it.
• Pension Commencement Lump Sum: otherwise known as your “tax-free lump sum”, which you are allowed to take from your pension pot. While this is typically 25%, some pensions allow you to take more. While this is increasingly rare, a financial planner could confirm whether your retirement fund provides this potentially valuable option.

Get in touch

As you can see, accessing your pension income without speaking to a financial planner could have implications for the amount of tax you pay, the level of income you generate and your pension’s longevity.

If you would like to discuss how best to access your pension, or speak with us about retirement planning, please contact us on 0800 434 6337.

Please note:

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.