Research from HSBC Tomorrow Master Trust has found that nearly £2 billion is being lost by pensioners when claiming their workplace pension.
The reasons for this include high tax bills, penalty charges for transferring and a lack of retirement income choices.
So let’s look at what you should consider when claiming your workplace pension.
What to watch out for when claiming your workplace pension
You can actually now claim your workplace pension benefits from age 55 as this is currently the minimum pension age.
Thanks to Pension Freedoms rules which came into force in 2015 you can now take your entire pension pot as a lump sum if you wanted.
There may be a temptation to take funds at this point but you need to be careful, particularly if you are still working.
If you were to withdraw your entire pension pot then 25% should be tax free and the other 75% would be subject to Income Tax at your marginal rate.
So if you were still working and a higher rate tax payer for example, you would pay 40% tax on the majority of your pension pot.
If your pension pot is over £1,073,100 or you have a number of pensions that when combined are over, then you may find there is a Lifetime Allowance charge when claiming your workplace pension.
Some older style pensions will charge you a penalty if you take benefits earlier than planned or if you transfer the pension to a different provider.
If you are going to be claiming your workplace pension whilst you are still working then be aware of the Money Purchase Annual Allowance.
Once you have claimed benefits you might be restricted in how much you and your employer can pay into pensions going forward. Your employer will not know if you have taken pension benefits from a scheme and therefore could carry on making payments in as normal. If these take you over the limits then you will face a tax charge.
Your options when claiming your workplace pension
When you originally set up your workplace pension you probably selected a nominated retirement age.
This nominated retirement age gives the pension provider some guidance as to what investment strategies may be appropriate for you and allows them to provide you with an indication of total costs over the length of the pension.
As you approach this nominated retirement age your pension provider will write to you with a list of retirement options.
The first thing to be aware of here is that you don’t need to do anything. Just because you selected a retirement age it doesn’t mean you have to claim your pension benefits. You could in fact leave everything as it is until a later date.
If you do this make sure your investment strategy has not automatically de-risked you into something low risk which is not likely to give you much of a return going forward.
If you are ready to claim your workplace pension the first option you will likely be offered is an annuity.
This is the offer of a secure income and a one off lump sum for the rest of your life. It does mean you give up your pension pot though.
If this option appeals to you it is vital you shop around other annuity providers to get the best deal. You workplace pension provider will only offer you their deal but you could get thousands more in income per year by finding the best provider.
If giving up your pension pot for a set level of income for the rest of your life doesn’t appeal to you then you could look at claiming your workplace pension flexibly.
This could mean:
- Taking a small lump sum and leaving the rest until later.
- Taking a larger monthly income now with plans to reduce it or stop it at some point in the future.
- Taking a series of lump sums as and when you need them.
It’s likely that your workplace pension provider will not be able to offer you the full range of pension flexibility and therefore you may need to transfer to a provider that can.
If you are considering what to do with your workplace pension please get in touch for a free no obligation 15-minute call. We would be happy to review your position, explain where you stand and what you need to do to get the retirement you desire. We’ve created hundreds of happy retirements, this could be you too!
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.