5 important considerations to make before you touch your pension savings in 2024

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Earlier in life, you will likely focus on building your pension savings as much as possible so you can fund your dream lifestyle in retirement. As you get closer to your chosen retirement age, you may need to consider how to get the most out of those savings.

Choosing the right time and considering how you draw from a defined contribution (DC) pension could make a significant difference to your quality of life.

So, if 2024 is the year that you will start accessing your retirement savings, it’s important to plan carefully.

Here are five important considerations to make before you touch your DC pension.

1. How much you will spend in retirement

Knowing how much you will spend in retirement is important because it allows you to sustainably draw from your savings.

Without a clear budget, you could spend more than you can realistically afford and deplete your savings too quickly. On the other hand, if you are worried about overspending, you might cut back too much and make unnecessary sacrifices to your lifestyle.

When creating a budget, consider your regular outgoings such as mortgage payments, utility bills, food, and entertainment. You may also need to account for bigger expected costs including travel or home maintenance. Additionally, there are some significant expenses you might face later in life including care costs.

It may also be useful to think about whether you want to financially support your family. For example, you might want to help a child or grandchild pay for a wedding or a deposit on their first home.

Adding up these costs and knowing what you are likely to spend in retirement means you can draw a suitable amount from your pension each year and fund your chosen lifestyle without overspending.

This also allows you to leave more of your pension savings invested for longer, so you could see more growth over time.

2. Different ways to generate an income from your savings

Once you know how much you need to fund your lifestyle in retirement, you may need to consider different options for generating an income from your pension savings.

You can normally take 25% of your DC pension as a tax-free lump sum. If you have specific goals such as purchasing a new home or supporting family members, you might decide to take the entire lump sum at once.

However, you can take the 25% tax-free cash in stages if you don’t need it all right away. This may be beneficial as you could leave more of your pension savings invested and reduce the risk of inflation eroding the value of your wealth if you withdraw it from your pot and then leave it in a cash savings account.

Limiting the amount you draw from your pension could also help you reduce the Income Tax that you pay (more on this later).

You can also transfer your pension to drawdown and withdraw a regular income from it. This gives you the flexibility to take as much or as little as you need.

Alternatively, you could use some or all of your savings to purchase an annuity. This provides a regular income for a set period of time – sometimes the rest of your life. Download our guide to annuities to learn more about this option.

3. What tax you could pay on your pension

Understanding the tax you could pay on your pension is crucial so you can retain as much of your wealth as possible and use it to fund your retirement.

Typically, the first 25% you draw from your DC pension is tax-free, up to a maximum of £268,275. Any further income you take from your savings is normally taxable.

In the 2023/24 tax year, you have a Personal Allowance of £12,570 and any income that exceeds this is likely subject to Income Tax.

This is one reason why it’s important that you only draw what you need to fund your lifestyle as this makes it easier to reduce the tax you pay.

You could also use savings in an ISA first and reduce the amount you take from your pension as funds in an ISA are not subject to Income Tax.

It may be useful to seek advice about the most tax-efficient ways to draw from your pension savings.

4. How the Money Purchase Annual Allowance could affect you

In the 2023/24 tax year, your Annual Allowance – the amount you can contribute to your pension without facing an additional tax charge – is £60,000 or 100% of your earnings, whichever is lower. This may be reduced if your income exceeds certain thresholds.

Your Annual Allowance may be reduced if you flexibly access your DC pension. This is known as the “Money Purchase Annual Allowance” (MPAA). You may trigger this if:

  • You take a tax-free lump sum from a DC pension over and above your 25% tax-free amount
  • You transfer your DC pension to drawdown and start taking an income
  • You buy an investment-linked or flexible annuity where your income could go down.

Once you trigger the MPAA, your Annual Allowance effectively falls to £10,000, meaning you can’t make as many tax-efficient contributions to your pension from your earnings.

This may not be an issue if you plan to stop working altogether and generate your entire income from your pension.

However, if you plan to draw from your pension while you are still working and continue making contributions to your pot, this could reduce the tax efficiency of your fund.

It’s important to consider how the MPAA could affect you and whether you are still likely to make contributions of more than £10,000 before you access your pension as you can’t go back once you do.

5. Factors that could affect the value of your pension savings

There are several factors that could affect the value of your pension savings and, in some cases, this could make it more difficult to achieve your desired lifestyle.

For instance, when inflation is high and prices rise, you might find that your wealth doesn’t go as far. As a result, you might need to draw a higher income from your pension to maintain your lifestyle.

This could mean that you deplete your savings faster, so you may need to adjust your budget.

Market volatility could also affect pension savings that are still invested. When prices fall, you may need to sell more units to generate the same level of income. Again, this could mean that you deplete your savings faster.

You may need to think about how inflation or market fluctuations could affect you before you access your pension. Working with a financial planner might help you account for these factors so you can continue drawing sustainably from your retirement savings.

Get in touch

If you are ready to access your pension, we can provide guidance to help you get the most out of your retirement savings.

Email enquiries@blackswanfp.co.uk or contact your adviser on 020 3828 8100.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients 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.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

We aim to keep our clients up to date on interesting and relevant financial news.

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