How well do you know your pension?
First published on 05 of April 2016 • Updated 26 of September 2017
When you reach 55 you gain your pension freedom – and with great freedom comes great responsibility. How ready are you to make the choices that will shape the whole of your retirement? Find out by taking our not-really-a-quiz below…
So you've saved all your life, and now you're looking forward to accessing your pension pots. But in order to make the best use of anything, you’ve got to know it inside out. So how well do you know your pension? You’ll get some idea by answering these simple questions.
- Do you have a pension?
[ ] Just a state pension… I think
[ ] Yes, a workplace pension
[ ] Yes, a personal pension
[ ] Pension? Moi?
Shockingly, more than a quarter of UK adults have no private pension at all. Women in particular are poorly prepared, with 36 per cent being without a pension. The introduction of auto-enrolment into workplace pensions has seen 1.7 million more people finally starting to save for retirement – but many of these new joiners are still paying in only the minimum contributions.
- What type of pension do you have?
[ ] Defined benefit
[ ] Defined contribution
[ ] Both
[ ] Don’t know
In our research we found that 27 per cent of people have a defined contribution (DC) pension, 18 per cent have a defined benefit (DB) pension, and 12 per cent have both. But what about everyone else? Well, it turns out that 43 per cent just didn’t know. This is a big thing for so many people not to know about, as the difference between those pension types is even bigger than it used to be.
Most of those ‘don’t knows’ probably have DC pensions. A DC pension is a pot of money that you build up over time, which you can then access from the age of 55. By contrast, a DB (or final salary) pension is similar to an annuity – a regular guaranteed payment made to you for the rest of your life.
The big point to note here is that DB pensions can’t be accessed through pension freedom, unless you transfer them (convert them into a pot of money). However, it’s often not the best option, so you should definitely seek advice if you’re intended to do this.
- The new state pension is
[ ] Higher
[ ] Lower
[ ] Both
[ ] I’m confused
The new state pension (paid to those who reach/reached state pension age later than 6 April 2016) is technically higher than the old one – £155.65 compared to £115.95. However, the additional state pension – which can provide up to £166 more per week – is no longer available for new pensioners. So the new state pension is higher for some than it would have been… but lower for others. (We said it was confusing.) Also, many people won’t qualify for the full £155.65 per week, because of gaps in their National Insurance payments (caused by career breaks etc).
- When I draw my pension, I can take
[ ] 25 per cent tax free
[ ] 25 per cent tax free every tax year
[ ] 25 per cent of each withdrawal tax free
[ ] The whole thing tax free
Only one of these is completely wrong. Can you guess which? It’s number 2. You can take 25 per cent of your entire pension pot tax free – but only once. However, this also means that you can make a series of smaller withdrawals, with 25 per cent of each tax free.
But what about taking the whole thing tax free? Can that be right? Well, it is theoretically achievable, if you were to keep your withdrawals (and other income) within the personal allowance (currently £11,500). Drawing your pension this way would mean paying no income tax at all on it.
- I expect to start receiving my state pension
[ ] When I’m 60
[ ] When I’m 65
[ ] When I’m Sixty-Four!
[ ] When I retire
Many people have had an unpleasant surprise relating to the state pension. Women used to receive it from the age of 60, but this age is now rising steady (it’s currently 63) and for both men and women it will be 67 by 2028. This means that an increasing number of people – women especially – may have to cover a gap during which they are not earning and not receiving a state pension.
And now you’ve got that song in your head.
- What should you do if you have several pensions?
[ ] Leave them separate
[ ] Consolidate them into one
[ ] It depends
In most cases, having several pension pots means higher administration fees, and also the likelihood that some aren’t performing as well as others. Ask an adviser about the best way to consolidate your pensions into one. However, in some instances it’s better not to do this. For instance, a DB (final salary) pension is often worth keeping, as they offer value that is hard to match on the annuity market. Also, any DC pension that may have a Guaranteed Annuity Rate (GAR) attached. These can be like gold dust – find out more about them here.
- You can use your pension to give yourself
[ ] A guaranteed income for life
[ ] A flexible income that could run out
[ ] One big lump sum
[ ] All of the above
The answer is, all of the above. With pension freedom it’s possible to mix and match your options; for example, to take a 25 per cent tax-free lump sum to cover immediate spending plans, set up a drawdown scheme for ongoing flexible income, and purchase an annuity to provide a cast-iron safety net so you always have some money coming in. How well you can achieve this mix will depend on the original size of your pension pot – so boost it as much as you can in the years before you access it.
- Taking advice on my pension choices is
[ ] Unnecessary
[ ] Just a formality – my provider insists on it
[ ] Likely to boost my income a little
[ ] Likely to boost my income a lot
Many people have been told by their pension providers that they need to take financial advice in order to transfer their DB schemes or move pension pots with GARs. With very small pots, this can sometimes seem unnecessary – but never underestimate the value that advice can deliver at retirement. Just shopping around for the right annuity can save you thousands over the course of your retirement, while advice on using pension freedom can do more than just save you money – it can save you from running out of it.
Most of all, the security that comes from taking expert advice at this critical life stage can provide invaluable peace of mind. After all, retirement shouldn’t be a guessing-game.