On the cover Your pension questions answered Expert advice on planning for retirement

Our experts solve your biggest concerns

Q WHAT’S AN ANNUITY AND SHOULD I BUY ONE? A

If you have a defined contribution pension (see box right), it can be used to buy a financial product that then gives you a guaranteed income for as long as you live – this is an annuity.

You can use your entire pot to buy an annuity, or take 25% tax-free and use 75% to buy an annuity. The benefit of an annuity is that you buy a guaranteed income for life, but there’s no flexibility to cancel or amend it, even if your circumstances change.

Buying an annuity is just one option. There are other ways you can take your money, which may give you more flexibility:

DO NOTHING. You don’t have to take your pension on your retirement date – you can just leave it there growing until you are ready.

USE FLEXI-ACCESS DRAWDOWN.

You can take money from your pot as and when you need it and the rest remains invested, allowing it to grow for your future income.

CASH IT ALL IN. You’ll get 25% of it tax-free and pay income tax on the rest. If you do this, make sure you have thought carefully

about how you will fund living costs in the years ahead.

TAKE SMALL LUMP SUMS.

Each small lump sum will be 25% tax-free.

Whatever you decide, take advice first from a qualified independent financial adviser, as the wrong move could mean you end up with less retirement income.

Q DO I NEED A FINANCIAL ADVISER AND HOW MUCH DO THEY CHARGE? A

Your first stop should be Pension Wise (pensionwise.gov.uk) – a free government service for over-50s. If you need further advice, contact an independent financial adviser (find one at vouchedfor.co.uk or unbiased.co.uk). According to insurance company Royal London, financial advice could leave you as much as £50,000 better off in retirement.

Your initial phone call and consultation is normally free, but after that expect to pay a minimum of £750 for a full consultation. ‘You can’t undo a bad decision, so get as much advice as possible,’ says chartered financial planner Claire Walsh. ‘The savings often far outweigh the fees.’

Q I’ve moved companies several times during my career, all with different pension providers. Should I combine my pensions into one?

A

Bringing all your pensions together could save on fees and ease the admin headache. However, make sure you’re not giving up any guaranteed benefits with existing plans. It’s generally considered a bad idea to transfer out of a defined benefit scheme. You can ask the provider about this or talk to The Pensions Advisory Service (pensionsadvisoryservice.org. uk) for free on 0800 011 3797. If you’re unable to find past pensions, you can track them down using the government’s pension tracing service at gov. uk/find-pension-contact-details.

Q If I’m missing any years of National Insurance contributions before I retire, can I make a payment to get a full state pension?

A

You generally need 35 years of National Insurance contribution for a full state pension and a minimum of 10 years to get any. You can pay voluntary NI contributions to plug any gaps, but before you do, see what your state pension is at gov.uk/check-state-pension. It may be more than you realise. For further information about buying voluntary NI contributions, visit gov.uk/voluntarynational-insurance-contributions.

Q My pension seems to have shrunk. Should I be worried?

A

If the pension value in your last statement was lower than expected, don’t panic. ‘Your pension is an investment, which means savings are put to work in the stock markets,’ says Rebecca O’connor, head of pensions and savings at Interactive Investor. ‘It’s therefore natural that it will rise and fall in value to some extent, but pensions are invested over many years, so the general trend in the value of your fund should be up, even if there are a few downs along the way.’ However, Rebecca warns that if you’re close to retirement and there has been a drop in the value of your pot, it may be worth sitting tight until it picks up again.

A

Anyone can withdraw money from their pension when they hit 55, even if they’re working. You can withdraw up to 25% tax-free. ‘The tax-free lump sum won’t affect your tax position,’ says Steve Webb, former pensions minister and partner at consultants LCP.

‘But if you withdraw more than your tax-free lump sum, you’ll pay tax.’ Claire warns: ‘Withdrawing more than your tax-free sum when working will trigger limits on how much you can pay into a pension going forward.’

Q

I’m still working, but I want to take my tax-free lump sum from my pension pot. Will I have to pay more tax on my income if I do?