Five ways to boost your retirement income

With people living longer in retirement, it’s important to make your pension income go further. 

1. Keep tax bills to a minimum

The way you take benefits from your pension can affect the amount of tax you pay, so it’s important to think carefully before you make any withdrawals.

You are usually allowed to take up to 25% of your entire pension pot tax-free; you may choose to keep the remaining balance invested, or receive a taxable income from it. If you decide to take out all the money from your pension in one go you will be charged Income Tax at your highest marginal rate on the remaining 75% of your pension pot.

Pension freedoms introduced in 2015 mean that, once you reach the age of 55, you can take as much cash out of your pension as you want. However, taking a big lump sum from your pension could mean you pay more tax, so you should always work out how much tax you will have to pay before you take money out.

Remember that you could also pay Income Tax on your State Pension, earnings from employment, and any other income which, when combined with a pension withdrawal, could push you into a higher tax bracket.

2. Consider deferring your State Pension

The maximum State Pension you can receive under current rules is ￡159.55 per week. However, it’s a little-known fact that retirees can defer their State Pension and get a higher income when they claim it later in retirement.

For someone who has sufficient income or savings to live off in the meantime, delaying the State Pension can be attractive because the benefits can really add up. For instance, your pension will rise by 1% for every nine weeks that you defer taking your State Pension, which works out at just under 5.8% for every full year you delay claiming it.

Retirees looking to defer their State Pension should always seek appropriate advice as deferring could affect other areas of financial planning and some other welfare benefits.

3. Top up your pension

Speculation remains over whether the government will cut pension tax reliefs and allowances in a bid to reduce public spending. Therefore, if you’ve still got a few years to go before retirement, you should think about boosting your pension savings now, so that you can benefit from current rates of tax relief and potentially enjoy a higher income when you stop work.

If you’re a basic rate taxpayer, you will receive tax relief at 20% on your pension contributions, which will automatically be added to your pot. If you’re a higher or additional rate taxpayer, you can claim an extra 20% or 25% through your self-assessment tax return. It means that a pension contribution of ￡1,000 can cost a top-rate tax payer as little as ￡550.

4. See if you qualify for higher annuity income

If you smoke, drink heavily, or have health problems, then you could qualify for an ‘impaired life annuity’ or ‘enhanced annuity’, which can offer much more income than a standard annuity, as pay-outs reflect your reduced life expectancy.

An enhanced annuity pays you a guaranteed income during retirement which is guaranteed for the rest of your life. Even if you think any condition you have is relatively minor, it is always worth finding out whether you could qualify for this type of annuity, as it could provide a substantial boost to your retirement income.

5. Combine your pension pots

If you have several pension pots with different providers, it may be a good idea to combine them in one pot. This will make it easier to keep track of your overall savings and estimated income at retirement.

There can be benefits to consolidation as many older-style pensions do not offer access to the new range of pension freedoms. It could also be a good idea to consolidate if one or more pension pot has an inappropriate level of equity exposure or is languishing in a poorly-performing fund.

Other schemes, such as defined benefit, or final salary schemes can be transferred. However, it will not be suitable for everyone; and any decision to transfer should not be taken lightly, as you could lose valuable and sometimes guaranteed benefits.

It’s important people take time to understand the pros and cons of consolidation and are clear on whether it’s right for them. This is where professional financial advice will really add value.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

The level and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.