What is the Average UK Pension in Retirement?
According to the Association of British Insurers (ABI), the average pension pot for drawdown in the UK is now nearly 63,100 GBP which would give an annual retirement income of around £3,000 – £4,000 per year.
The average annual pension income drops by two-thirds upon retirement and the average income is around £8,774 per year or about three quarters of the minimum wage according to a poll by financial provider LV. The higher figure includes state pensions which makes up around half of pension income which explains the discrepancy above.
However, income from pensions is not the only story for pensioners’ total income.
The government statistics put pensioners’ total income much higher at £397 per week or £19,056 per year.
This includes investment income, benefits and earnings, so pensioners are much better off than the media portrays.
They are also richer than pensioners fourteen years ago (1998 – 2012) as their real incomes have risen by 37%.
Furthermore, the average pension pot size has tumbled 24% from this time last year. Does this mean that financial advisers are taking more risk for clients and how should this be addressed?
Annuities provide a guaranteed income, but they have fallen 56% from this time last year. Whilst guaranteed pensions are becoming extinct, the average pensioner is now facing more risk. Whilst markets are likely to rebound, with a 24% fall in the average pension pot, it seems that most pots are highly correlated to equities are perhaps to even more risky assets such as property assets or even unregulated assets.
A more balanced approached is needed to make a pension last longer with an equity/bond mix to reduce fluctuations in your pension pot plus possibly some precious metals as a hedge, although this should only make up a small slice of your portfolio for diversification.
Can I Cash in My Pension
If you are 55, you are allowed to cash-in your pension scheme under George Osbourne’s new “flexible pension” rules.
Why cash in your pension scheme in the UK?
- To pay off debt/pay off credit cards/pay off a mortgage
- Pay for holiday/new car/new house/upgrade house
- Investment for self-employed business
- Provide short term cash
Which one of these do you think are acceptable forms for your pension? If you said (a) only then you are correct. A pension is an income for your future self. Look in the mirror and imagine yourself at 65 years old. More than half of people at that age have a long term illness. Likely you are tired and would prefer not to work, but your 55 year old self has decided he needs cash to buy a holiday and now you will have to work until you are 75.
Cashing-in your pension guarantees that you will have a lower annual pension income at retirement. Also, if you are using to purchase a buy-to-let, you should be aware of all the costs and taxes involved in such an investment.
Costs of Cashing-in your Pension Early to Buy Property
- Real estate fees
- Solicitor fees
- Fees to purchase the title deed
- Stamp Duty (SDLT)
- Upkeep fees – costs to fix the house
- Property Insurance
- Title deed fees
- Capital gains tax, income tax on rental income and inheritance tax. Essentially you will pay tax TWICE taking your pension from a tax-free environment into a tax deductible environment where you are paying tax on growth plus double income tax!
How to Make the Most of Your Pension Pot
- A wise way to invest is to diversify your assets and to buy a mix of bonds and equities. A pension pot which grows at 7% doubles every 10 years.
- Delay taking your state pension
- Delay taking your lump sum pension pot
- Get professional financial advice
- Use investment managers who rebalance frequently and send you automatic statements
- Look to reduce your tax bill – especially if you are an expat, there are numerous avenues such as moving your pension offshore to a QROPS to reduce your tax bill
What Taxes Would I Pay if I Cashed in My Pension?
- You pay no tax on first 10,000 GBP every year
- You pay 20% tax on any annual income of over 31,865 GBP
- You pay 40% tax on annual income of £31,866 to £150,000
- There is an additional rate of 45% if you are lucky enough to have a pension above £150,000
- There is a 45% tax on the lump sum on death after age 75
How Can I Avoid Taxes When I Cash-in My Pension?
There are no ways to avoid taxes when cashing in your pension schemes if you remain to live in the UK. However, if you retire abroad, you can avoid all these taxes.
You can retire in your dream destination of Spain, Portugal, France, Crete, Cyprus, the Greek Islands, Australia, Africa, India or South East Asia for example and you can avoid UK taxation.
A Gibraltar QROPS can help you
- Avoid all tax on death
- Avoid income taxes in the United Kingdom
- Pay only a flat rate of tax of only 2.5% in Gibraltar
- Helps you to move your pension into another currency, such as the US Dollar, the world’s reserve currency which makes up 65% of all global currency transactions
- You can invest with the best investment fund managers in the world such as Goldman Sachs and JPMorgan
- You can give away your pension pot to whomever you please upon death tax-free and it also acts as an automatic Will for your pension
Where Can I Go for Advice When Cashing in My Pension?
If you are based in the UK, we advise you to seek out government advice via the website below or contact the FCA for a registered list of advisers.
For more information on the new pension freedoms and flexible pension schemes, please contact us or you can contact these government departments.
For expats, we provide fiduciary financial advice to those who are working abroad or retired abroad and looking for financial guidance. We can help you with tax planning via our international tax planning experts that we liaise with and help you with a range of financial planning.
We work with an investment management company who use Interactive Brokers, who have $4 billion under management. IB are regulated by the FCA, FSA, SEC and FINRA as well as many other authorized regulatory authorities.
We can give you guidance over the telephone and also will answer any questions you have via email. We are happy to provide ethical, professional investment guidance and financial planning guidance. You only pay for advice if you are happy with our recommendations.