Will your retirement income last for life?
Once you’ve retired and are taking an income from your pension, you may wonder if there’s anything left to look after. While you know your date of birth and your current age, nobody knows how long they’ll live for and how long their money needs to last.
Some of your retirement income will be guaranteed no matter how long you live, such as your State Pension, an annuity or the income provided by a final salary or defined benefit pension.
Other sources of income may not be guaranteed for life, such as:
- investments – including ISAs and property
- drawdown – providing flexible access to your pension pot.
In particular, drawdown allows you the flexibility to take money from your pension without restriction. This could be as a regular income or lump sums.
If for instance, you withdraw too much, or if investment returns are lower than expected, you run the risk of running out of money. You need need to take account of this in your retirement planning.
When you are working out how much you can take out from drawdown or investments, it’s a good idea to think about how long you may need it for.
How long might you live for?
As a population we’re all living longer. A 65-year-old, on average, has a current life expectancy of 86 for men, and 88 for women. Some people will live longer, and others will die earlier.
Although this is only a guide, it does help you think about how long you may need your income for.
Leaving a legacy from your pensions
However long you live, you may want to pass on a legacy. As well as leaving personal items, investments or property, you can also leave money left in your pension.
If you have an annuity
When you bought your annuity you may have built in certain guarantees that would pay an ongoing income or lump sum on your death. If you didn’t do this from the start then nothing would be paid on your death, meaning the income stops and no lump sum would be paid to your beneficiaries.
If you use drawdown
With drawdown your beneficiaries will inherit what’s left of the fund on your death. It can be taken as an ongoing income, a lump sum or even kept as a pension. If you die before age 75, it can be paid to your beneficiaries tax-free. However if you die age 75 or older, all payments will be subject to income tax at their marginal rate.
Nominating a beneficiary
How do you make sure the right person gets any remaining money from your pension?
You can choose anyone you wish (called a nominee) by completing a nomination or expression of wish.
Any remaining money will then go to them. Without this instruction your pension provider will decide who gets it, and this will usually be restricted to just your dependants, which could include your spouse and younger children.
Those who inherit your pension (your nominee) can decide to keep the money as a pension plan, instead of it being paid out as a lump sum or income; This can help with tax planning and allows the pension to be passed on to future generations.
Contact your provider and ask for a nomination or expression of wish form to nominate who should inherit your pension.
Writing a will
A will records your instructions on what should happen to your money, property and personal possessions after your death. A will makes it much easier for your affairs to be sorted out.
If you don’t have a valid will when you die, everything will be split according to the law. This means your estate might not go where you want it to go. Sorting things out without a will can then become lengthy and stressful to resolve.
Writing a will is especially important if you have a partner or family who are dependent on you financially. A valid will can potentially help reduce the amount of Inheritance Tax that might be payable on the value of your estate – which is the value of everything you own, including property and money.
If your family circumstances are simple and straightforward, making your will can be quite easy. If your situation or requirements are more complicated – for example, following a marriage or divorce, you’ll need to be more careful of how you plan your instructions. This is also important if you want to leave things to specific charities or people outside your immediate family.
A will doesn’t have to be on fancy paper or use a lot of legal jargon. There are a number of ways you can arrange a will, such as:
- using a solicitor
- using a specialist will writing service
- writing it yourself, using a low-cost pack.
You can find more information on writing a will at moneyadviceservice.org.uk/en/categories/making-a-will
What happens to the money left in your pension pot when you die?
It's important to know what happens to the money you've saved after you've gone. This video explains the tax implications and how it's paid to beneficiaries.