Making the most of pensions
A study carried out by the PPI for NAPF has illustrated how employees and employers can maximise retirement income
• Opting out of pension saving between the ages of 30 and 40 and starting to save 10 years later can reduce private pension income by 32 per cent.
• Retiring two years before state pension age and starting to drawdown your pension can reduce private pension income by 18 per cent.
Shopping around for an annuity, saving in a scheme with lower charges and not taking a lump-sum can also increase private pension income.
There are several other employee and employer choices which can increase private pension income in retirement. Shopping around for the best available annuity rate could increase private pension income by around 5 per cent when compared to a mid-range annuity price.
The level of charges in the pension scheme chosen by the employer can also significantly affect private pension income. If the example median earner saves in a scheme with a flat-rate annual management charge of 0.3 per cent, his private pension income could be around 2 per cent higher than if he had saved in a scheme with the National Employment Savings Trust’s combined charge – a 1.8 per cent contribution charge and a 0.3 per cent AMC. If it is assumed that the median-earning man saves in a scheme with a stakeholder cap – an AMC of 1.5 per cent for the first 10 years falling to 1 per cent – then his private pension income could be reduced by 13 per cent when compared to saving in a scheme with a Nest combined charging structure.
Choosing to annuitise the 25 per cent tax-free lump-sum alongside the rest of an individual’s private pension fund has the potential to increase income from private pensions by around 33 per cent. However people who annuitise their lump-sum will have to pay tax on income received from an annuity, whereas individuals would pay no tax if they took the 25 per cent as a lump-sum. If an individual does not annuitise their lump-sum, they may still use it to reinvest and/or provide themselves with an income in retirement and thereby increase overall retirement income if not private pension income.
Choices made by employers and employees can also reduce private pension income in retirement. Choices that employers make regarding their level of pension contributions and the fund charges can increase or reduce the level of private pension income employees receive in retirement. Employee choices such as opting out of pension saving if auto-enrolled and leaving work early also have the potential to reduce private pension income in retirement.
For example, if the median-earning man opts out of pension saving for 10 years between age 30 and age 40 his private pension income could be reduced by around 32 per cent. And if the median-earning man leaves work two years before state pension age his private pension income could be reduced by 18 per cent.