Managing your pension in your 50s

In your 50s, retirement might be just over the horizon. All the years of saving for a goal in the distant future will suddenly start to pay off for avid investors. But now, there will be a new consideration: How do you manage your retirement savings, and when and how can you access them? Here are the main things you need to think about with pensions in your 50s.

Get your investments in order

If you’re planning to access your pension in the next five or ten years, you should start thinking about how you want to generate an income from your fund. Depending on the option you choose, this may have a big impact on how you invest your money.

For example, a 55-year-old planning to stop working at 60 and use their entire fund to buy an annuity may want to reduce the amount of investment risk they are taking as they approach their chosen retirement date. The same could be said for those who plan to take their entire fund as cash.

If you didn’t do this you could experience a poorly timed drop in stock markets that has a dramatic impact on your pension pot, and not have the time left before you plan to retire for the value to recover.

You can also plan to stay invested during retirement and determine how much income to draw from your pot each year. But it’s still worth reviewing your investments as you approach retirement. This may not necessarily mean you have to make a big change but it's worth checking you're still happy with your investments and the level of risk in your portfolio.

Accessing your pension

If you’re aged 55 or over then you have the option to access your personal pension, with 25% of it available tax-free and the rest taxed in the same way as income. The age at which you can access your pension is due to rise to 57 on 6 April 2028.

However, just because you can access your hard-earned retirement fund doesn’t necessarily mean you should. The earlier you start taking out your pension money, the longer it will potentially have to last for in retirement – and if you draw too much too soon, you risk running out of money early.

It also may be tempting to take out your 25% tax free allowance immediately, but the best way to do this can be dependent on your individual tax and income circumstances, so it’s important to consider this before making the withdrawal.

To give you a rough idea of how far your pension pot might stretch, let’s assume a saver has a £100,000 pension and needs to take out £5,000 a year to support their lifestyle, with the income going up each year in line with inflation of 2%.

If they achieve investment returns of 4% after charges, their fund will last around 25 years. For someone taking an income from age 55, that means they risk running out of money by the age of 80.

Given average life expectancy at age 55 is 84 for men and 87 for women, someone in good health might have  to spend their remaining years relying solely on the state pension, which might not be enough for their lifestyle. In addition, since the state pension age is currently 66 (and rising in the coming years), the first decade or so of retirement would be without state pension aid.

These figures are just an example, and the reality will differ depending on the size of someone’s pension, their other income sources and their own life expectancy. However, it’s worth being aware of what taking too much from the pot at a younger age could lead to. Currently, the Pensions and Lifetime Savings Association estimates that a single person would need £31,700 of income each year (in today’s money) to live a ‘moderate’ lifestyle in retirement.

Tax consequences

You should also consider the impact taking money from your pension will have on the tax you pay. If you opt for big withdrawals – or even plan to take your entire fund out in one go – you risk pushing yourself into a higher income tax bracket. By drip feeding withdrawals slowly, you can not only prolong the life of your pension but also reduce the amount of income tax you pay.

Anyone taking taxable income from their defined contribution pension (money beyond that 25% tax free) also needs to be aware of the impact of something called the ‘money purchase annual allowance’. This is where the amount you can pay into your pension each year is reduced if you’ve already flexibly accessed the money in your pension. If you access even £1 of taxable income flexibly from your pension, your annual allowance will be lowered from £60,000 to just £10,000.

On top of that, you’ll lose the ability to carry forward unused pension allowances from the three previous tax years.

Note that you won’t trigger the money purchase annual allowance if you buy an annuity, just take your 25% tax-free cash or take a ‘small pots’ withdrawal. A small pots withdrawal is where you withdraw all the money from a pension worth £10,000 or less, with 25% of the withdrawal tax-free and the rest taxed as income.

Consider combining your pensions

As your retirement edges closer, you might want to track down any old pensions you have and combine them with a single provider. The Government’s pension tracing service is a good place to start.
There are many good reasons to combine your pensions. Firstly, it is an opportunity to lower your charges, which can have a profoundly positive impact on and through your retirement, particularly over the longer term.

Secondly, it’s a lot easier to manage a single pension versus lots of different pots with different providers. You may also be given greater flexibility by transferring, both in terms of the investments available and withdrawal options.

However, there are also reasons to be careful before transferring your pensions. For example, some older-style pensions have valuable guarantees attached that will be lost if you switch to a different provider, so make sure you check your documentation and speak to your existing provider before making a transfer. In addition, some older policies have exit fees which can make it expensive to move your money. Check out more information if you're wanting to combine your pensions.

The tapered annual allowance

While most people enjoy a £60,000 pensions annual allowance, you may face a smaller limit if you exceed certain income levels. To have a diminishing pension allowance, you would have to have a threshold income above £200,000. To calculate your threshold income, you add all the income you earn (including investments) but deduct things like pension contributions. If you’re over the threshold income, you need to see if you exceed the adjusted income limit, which is £260,000. Adjusted income includes things like pension savings and any tax relief you get from HMRC.

Anyone who exceeds these limits will have their annual pension allowance reduced by £1 for every £2 of adjusted income earned above £260,000, to a minimum of £10,000 for those with an adjusted income of £360,000 or more. If you breach your allowance the taxman will come for any tax relief you have received over and above your annual allowance.