Taking an income from your retirement savings The Trust Retirement Guide

Transcription

1 Taking an income from your retirement savings The Trust Retirement Guide

2 Your money, your choice The longest holiday of your life - you may have been dreaming of all the things you plan to do when you stop or cut back working. You ve saved to provide an income to support you and your loved-ones with the day-to-day needs, as well as some treats now and again. The Trust gives you the choice on how to use your money to suit your needs. This guide explains how you can choose to provide for your future, to help you make the most of your retirement savings. There s a wide range of choice on how you use your money and the good news is you can mix and match to meet your needs. You can also model different ways of using your savings with our retirement planner, taking account of other income you might get from the State Pension or other pension plans you have to give you the whole picture. If you log in to My Account first, the planner automatically takes account of what you ve saved up in the Trust and any future payments you expect to make. It s important to take what help and guidance you can get, to make the most of your savings. The great news is the government offers a free service through Pension Wise. More details on how this can help you is covered in this guide. Not all pension plans give you full control on how you use your retirement savings, but they may offer other valuable guarantees worth holding on to. When you ve decided how you want to use your retirement savings, it s worth seeing if you can better meet your needs by transferring any old plans you might have to the Trust. There s no guarantee you will get a better outcome, but it is an option you need to consider. If you are unsure how to use your retirement savings to support your future income needs, you should speak to your financial adviser. You will have to pay for any advice you receive. If you don t have a financial adviser, you can find one on your doorstep at unbiased.co.uk or vouchedfor.co.uk. If you have any questions, comments or suggestions, please let us know so we can continue to improve the Trust for your benefit. The Trustees 2

3 Contents When can I retire? How does a flexible income work? How does a secure income work? How do cash lump sums work? How do tax-free cash lump sums work? How does it work if I mix how I take an income? How does tax affect my income in retirement? What happens to my money when I die? How do I start taking an income? What things do I need to consider at the different stages of retirement? Your income choices There s a number of steps and things to consider before, at and in retirement - so you can make the most of your retirement savings. This guide gives you information to consider at each of these stages, as well as explaining your income choices. Let s start by taking a high level view of how you can take an income from your savings: Flexible income If you want the flexibility to vary when and how much income you take out of your savings, you can leave your retirement savings invested. This allows you to take a regular taxable income and/or one off taxable lump sums. You can also take up to a quarter of your savings as a tax-free lump sum. Find out more Secure income If you prefer the comfort of a guaranteed income for the rest of your life, you can use some or all of your savings to buy an annuity. This income is also taxable, but you can also take up to a quarter of your savings as a tax-free lump sum. Find out more Cash lump sums You can also take some or all of your savings as a one-off or series of lump sums a quarter is tax-free. Find out more 3

4 When can I retire? The government rules allow you to start taking an income from your retirement savings when you reach age 55. They ve also announced this will increase to 57 from You might be relying on the State Pension to provide an income? This is paid at different ages, depending on when you born. You can check on the government s website to find out your State Pension age. At the end of the day, you can choose when you stop work and when you start taking an income, whether you re still working or not. The things which will influence your decision are likely to be: Whether you can continue working; If you have enough income to stop or cut back work; Other financial matters, such as loans, mortgages and credit card debt, which may need to be paid off; If you want or need to take an income, or would rather leave it invested. 4

5 How does a flexible income work? Quite simply, the way a flexible income works is you shift some or all of your money from your savings pot into an income pot. Here it remains invested, as before, and you choose to take a regular income and/or one-off lump sums. You can change how much you take out, to suit your needs and you can take up to a quarter of the amount moved across tax-free whether you a regular income or not. The rest is treated just like income you receive from work and is taxable, whether you take regular or one-off lump sum payments. take YEAR 2 or Move some or all your retirement savings to your income pot You can set up regular payments income Some important bits about flexible And change your payments and Take one-off payments A quarter of the value can be taken tax- free As with all the options you have, there are good bits and bad bits you need to be aware of: 1. Your money remains invested in funds which could drop in value meaning there are no guarantees what you might get; 2. You could run out of money if you take out too much and your savings don t grow by as much as you thought; YEARor 2 all of your money 3. While you can continue to make further savings after you move some toyear take2a taxable income, the maximum you can save each year drops to 4,000 (2019/20 tax year) if the amount you started with was more than 10,000; 4. If you take out a lot of money in any tax year, you could be subject to high levels of income tax; 5. You need to actively manage your investments and income payments to meet your needs. 5

6 How does a secure income work? To provide a secure regular income for life, you buy an insurance policy, called an annuity, which guarantees you a regular level of taxable income. You can also take up to a quarter of your savings as a tax-free lump sum, but this will reduce the amount of taxable income you will receive. You can choose a flat level of income or opt for increasing payments, to help protect the value from being eroded by inflation, however, your starting income will be a lot lower. You could also set it up to pay an income to your partner for their life when you die, or set a guarantee period for how long your income is paid, even if you die. or Buy an annuity to guarantee an income for life with Take up to a quarter as a tax-free lump sum and a smaller regular income There are good bits and bad bits you need to be aware of: Some important bits about a secure income Options to provide for your loved-ones 1. Just like other insurance products, you need to shop around to get the best deal. The Trust gives you access to a specialist broker who will seek to get you the highest income available; YEAR 3 2. Consider your health and lifestyle. You could get more income if your health or lifestyle could affect how long you might live. For example, if you are a smoker; 3. Currently, you can t change your mind once you have bought an annuity even if your circumstances change; 4. You may get back lessyear than 2the cost of the annuity, depending on how long you live. Even if you select a guarantee period or payments to continue to your partner, the income paid may be less than it cost; 5. Depending on interest rates when you choose to buy an annuity, you may get less income for your money. 6

7 payments work? How do cash lump sum You could take some or all of your savings as a cash lump sum. As before, a quarter of the money you receive is tax-free and the rest is taxable as income. By spreading your payments over a number of tax years, you could manage how much you are taxed by taking advantage of your tax allowance. or Take your savings as a one-off lump Spread the payments over a number of years to manage tax Some important bits about cash lump sums YEAR 2 of: There are good bits and bad bits you need to be aware with A quarter of your payment(s) are tax-free 1. When it s gone, it s gone. You ll need to rely on another source for income in retirement or carry on working; 2. By leaving your remaining money invested you benefit from tax savings on any growth. You can invest up to 20,000 a year in an ISA (2019/20 tax year) to get similar tax benefits; 3. If you take out too much, when added to any other income you may receive, you could have to pay tax of 40%, or more, on some of the lump sum; 3 more than 16,000 (2019/20 tax year) in 4. Any means tested benefits you receive may be impacted by taking a large lump sum andyear you hold savings; 5. You can continue to make further savings after taking a taxable lump sum, however the maximum you can save each year drops to 4,000 (2019/20 tax year) if the amount you started with was more than 10,000; 6. You can take out a tax free lump sum and leave the rest of your savings invested to use later. 7

8 How do tax-free cash lump sums work? You might decide you just need to use some of your savings to make a lump sum payment, such as clearing off the mortgage. By using some or all of your tax-free allowance (up to a quarter of the value of your savings) you can continue saving into the Trust without impacting the yearly limited (currently up to 40,000 a year). You could take one payment or a series of payments, then use the rest of your savings at a later date. or Take up to a quarter of your savings tax-free and Take a number of payments Continue to save up to 40,000 a year Some important bits about cash lump sums There are good bits and bad bits you need to be aware of: 1. By taking some of your savings early, you ll have less money to provide an income later; 2. By leaving your money invested you benefit from tax savings on any growth; 3. As the lump sum payment is tax-free, it doesn t count towards your earnings for income tax purposes; 4. Any means tested benefits you receive may be impacted by taking a large lump sum and holding more than 16,000 in savings; 5. Your yearly savings limit into the Trust, or any other retirement savings plan, is not impacted, so long as you re only taking tax-free payments. You can save up to 40,000 (2019/20 tax year). 8

9 How does it work if I mix how I take an income? We ve looked at the different choices you have in how you use your retirement savings to provide an income, but often our financial needs are not straightforward and a mix of income types might better suit these needs. For example, you: may need a lump sum to pay off expensive debt, or clear the mortgage; want a basic level of guaranteed income to cover the bills and weekly shop; would like to leave as much of your savings as you can for your loved-ones, when you die; might need an income in the short-term, until other income payments are due. You can use the flexibility the Trust offers to provide a mix of secure and flexible regular income and/or lump sums to meet your needs and preferences. You can also change how you take an income. For example, you might decide to take a cash sum and/or flexible income payments and buy an annuity at a later date. You really do have the choice on how you use your money saved in the Trust. 9

10 How will tax affect my income in retirement? As we ve covered, one of the great benefits of retirement savings is a quarter of what you build up can be taken as tax-free income. However, the remaining income you receive is treated like your pay from work and subject to income tax. This means what you re paid out is added to any other taxable income you receive each tax year, such as: the State Pension; other company or private pensions; earnings from employment; interest and dividends above your allowance; and property rental income. The total income is used to work out the rate(s) of tax you pay and the amount due. The Tax planner can help you get an idea of how much tax you might pay. You can also use the retirement planner to model different scenarios for how much income you take from your savings and what tax would be payable. By spreading out how much income you take each year, you could reduce the amount of tax you pay. Depending on your circumstances, the level of income and/or savings you have could also impact any benefits you currently receive or could get in the future. 10

11 What happens to my money when I die? If leaving something for your loved-ones when you die is important to you, then you should consider the differences in the treatment of each income solution and the tax situation. It can make a big difference to what might be left over and paid out: Flexible Income Before age 75 - Any money left in either your savings or income pots is paid out as a tax-free lump sum to your beneficiaries subject to the Trustees discretion After age 75 Any money remaining in the Trust is paid to your beneficiaries and taxed at their rate of income tax Secure Income This depends on the type of annuity you choose. Your payments stop when you die, unless you choose a guarantee period for payments to continue. If you opted for payments to continue for your partner and they are still alive, they will continue for their life Cash Lump Sums Any remaining money you have from cash lump sum payments will form part of your estate. This would be paid in accordance with your wishes and subject to inheritance tax If you still have any money left in the Trust, whether it s in your savings or income pot, it s important to ensure your nomination of beneficiaries is up to date. 11

12 How do I start taking an income? Once you know how you want to use your savings to give yourself an income, you will need to log in to My Account and go to the Pension Choices section to instruct us. You then follow a simple step by step route to choose how you wish to use your savings and where, when and how you want your income paid. As you work your way through the process, you will see a graphical summary of the choices you have made. If you choose to take a flexible income or leave some of your money in your savings pot, you can follow the same process to change your payments, use any money left over to provide an income, or alter how you want to take an income when you need to. You re in control to manage your savings and income payments. Remember: You can t alter an annuity (secure income) once you ve chosen to buy one. 12

13 What things do I need to consider at the different stages of retirement? It s important to plan your finances before, at and in retirement. There s several things you can do to make a big difference to your financial future. Why not use these simple checklists to help consider what actions you can take to help you. In the lead up to retirement How will I take my income? Having an idea of how you will use your savings to provide an income will help you with your investment choices and sorting out any other pensions you might have Do my other pensions suit my needs? It s worth tracking down any other pensions you might have and find out how you can use them to provide an income. Some types provide a guaranteed income, which might influence how you use your savings in the Trust. Others may not give you the flexibility you want and it might be worth considering transferring them to one that does What s the risk of my investments suffering a sharp fall in value? Depending on how you plan to take an income, you may want to consider if your investments still meet your needs. The Income Alignment strategies are designed to match how you might take an income and reduce the risks of the value of your savings dropping. You can, of course, choose your own investments. The Investment Guide gives you more information on the choices you have Do my savings need a boost? The retirement planner can be used to give you an idea of what income you might get. As long as you re still an employee, you can increase your regular payments, or add a one-off payment to boost your savings. You can make tax savings on your salary by making payments up to 40,000 in any tax year (2019/20 tax year rules). When do I want to retire? If you want to delay retiring you can leave your retirement savings invested. You will need to update your target retirement age, so we can help you in the lead up to this date. It s also important if your money is invested in an Income Alignment strategy, as the timing of the investment changes are based on this date. 13

14 At retirement Where can I get more help and advice? If you would like more details on your retirement choices, the guide from the Money Advice Service is a useful starting point. You re also entitled to use Pension Wise, for free face to face and/or telephone guidance on the choices you have at retirement. If you want advice, you ll need to speak to your financial adviser. If you don t have a financial adviser, you can find one on your doorstep at unbiased.co.uk or vouchedfor.co.uk. If you would like free tax advice then you can contact the charity Tax Help For Older People on or by visiting Alternatively you can contact HM Revenue & Customs on or by visiting What do I need to do to set up an income? As described on page 12, you can set up payments from the Trust using your online account. It s worth contacting the administrators of any other pensions you might have, well in advance as it can take some time for them to get your payments in place. If you re near your State Pension age, the government s Pension Service will normally contact you four months in advance to tell you how to claim your State Pension. 14 What if I can t afford to retire and/or need to boost my savings? You don t have to take an income on your target retirement age and, if you re carrying on working, you can continue to save into your Personal Account. Don t forget to update your target retirement age if you do decide to delay taking an income. You don t even have to take your State Pension at your State Pension age. If you delay your State Pension you could increase the amount you receive when you do claim it.

15 In retirement Do I need to worry about my investments? - If you leave any money invested in the Trust you will need to keep an eye on your investments and consider the level of risk you re happy with, just like you did when you were saving. What if my income needs change? If you are taking flexible income payments you can increase, decrease or stop your regular payments, and/or take a cash lump sum, at any time. Should you need more income and have money left in your savings pot (you didn t move all your savings to provide an income), you can choose to move more across to buy a regular income, take a flexible income and/or take cash payments. Enjoy my retirement! 15

16 And finally... If you would like a copy of this guide in a different format for ease of reading, please contact the Trust Administrators. This guide was created in February 2019 and information relating to taxation and regulations is based on the position at that time and details published for the 2019/20 tax year. trust@xpsgroup.com Telephone: XPS Pensions Group Phoenix House 1 Station Hill Reading RG1 1NB XPS Pensions Consulting Limited, Registered No XPS Investment Limited, Registered No XPS Pensions Limited, Registered No XPS Administration Limited, Registered No All registered at: Phoenix House, 1 Station Hill, Reading RG1 1NB. XPS Investment Limited is authorised and regulated by the Financial Conduct Authority for investment and general insurance business (FCA Register No ).. 015NPT (02/19)