Since 2015, with the reform of pension law, there has been a lot more choice in pensions. Pensions, such as that run by the Teachers Pension Scheme, are overseen by the government. The change in the law gives people options on how to save for future retirement. It meant that people could maximise the pension pot available, while also considering tax efficiencies.
These flexibilities can go both ways. You can pay more in, and you can opt to take money out. You may think that such freedom is always a good thing. However, without proper thought and management, it is also possible for such arrangements to negatively impact your financial health.
The positives
There is a lot to be gained from pension flexibilities. You can take a tax-free lump sum from your pension fund at the age of 55. This could help you plan for an easy and maybe a phased retirement. It could also allow you to seek new adventures once children have left home. As long as the amount taken from your pension does not exceed 25%, you can continue to take amounts out of the pension.
It is also a great idea to consider adding more to your pension fund. The flexibilities allow you to increase the accrual rate for your pension. This increase in contributions will help you guarantee the lifestyle you hope for in retirement.
The flexibilities also allow you to nominate beneficiaries. This means you have some control who receives the remaining funds from your pension in the event of your death.
The negatives
However, you need to bear in mind that there are some potential problems with such flexibilities.
If you leave your pension invested in the scheme, you are guaranteed a future return. If you take out the lump sum, you diminish this return. Similarly, if you are not careful, you could run out of funds in your pension lump sum – making your actual retirement a lot more challenging. The benefits of a large amount of money on retirement are to act as a cushion when you experience the change in salary conditions for the first time.
It is also possible that paying in more money now will not equate to a similar level of return when you retire.
In short, flexibilities are a powerful tool but should be used after significant input from an independent financial advisor.
The content in this article was correct on 15th January 2020. You should not rely on this article to make important financial decisions. Teachers Financial Planning offers advice on pensions for teachers and non-teachers. Please use the contact form below to arrange an informal chat with an advisor. See how we can help you.