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‘When To Take My Pension?’ Blog 195

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‘When To Take My Pension?’ Blog 195

7th February 2022

Paddy Delaney

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Aside from deciding to actually accumulate money for your post-work living, the decision about ‘when to take my pension benefit’ is the biggest financial life decision that many of us will need to make. It is akin to breaking open the cookie-jar that we have been diligently accumulating for decades. For many it is an emotional and financial conundrum, that I hope to help with. A combination of academic research and supporting people in this phase of life has given me some insights that I share here, and which I hope will be even somewhat helpful to you. No single article can address all that needs to be considered fully but the aspects we’ll explore today in this questions of ‘when to take my pension’ are;

  • The basics of taking pension benefits
  • Tax & Income factors to consider
  • Investment/return factors to consider
  • Personal factors to consider

‘When To Take My Pension’ – The basics of taking pension benefits

If you are taking benefits from a defined Benefit Scheme (DB) whether through Public or Private Service, the logistics of taking pension lump-sum and income is fairly straight-forward. You may decide to use any AVCs to get a larger lump sum while preserving the DB income aspect – but other than that, it’s a simple thing.

If you however are taking benefits from a Defined Contribution scheme through an employer or through your own business-sponsored Small Self-Administered Scheme (SSAS), there is more to consider and balance. Today is not the time nor the place to go through all of this again – please check out Blog 15, Blog 123, and Blog 172.

One note-worthy decision that relates to the topic of today of ‘when to take my pension’ is the decision to take your tax-free lump sum (TFLS) or not. It is apparent to me at least that this is less seen as an option, and moreso as a given when people are taking benefits from their pensions – but let me assure you, you can decide to NOT take any Tax Free Lump Sum, to take some TFLS, or to take the maximum 25% of the pot (subject to limits) as a TFLS. In some situations it makes sense NOT to take any of the Tax Free Lump Sum. For example, if one has limited or no income aside from the pension in question, and therefore paying low rate of tax on the pension income, it might make more sense for them financially to leave that money in the scheme. We explored this in full in Blog 171 – worth a read.

‘When To Take My Pension’ – The Tax & Income factors to consider

If you are approaching the point where you Exit Full-Time Employment (EFTE – how about that for a new acronym!?), you may be doing so before the default ‘Normal Retirement Age’ (NRA) of your scheme. For example, the NRA on your scheme may be 60 or 65 but you may be either older or younger than the NRA suggests. It really doesn’t make any difference to your options. The only one to be mindful of, is if you are a Proprietary Director and you want to access your pension benefits before your scheme NRA, you need to have relinquished any shareholding of the business before the Trustees are allowed to allow you take benefits. Otherwise, you can usually take benefits before or indeed after the scheme NRA. So, what are the tax/income factors to consider?

  • Income Need: will you comfortably be able to cover your living and lifestyle expenses once you EFTE, even without the lump sum or annual income draw-down from your pension? Or will you definitely need the lump sum/income from the pension to survive and live comfortably? If you need it, that’s that – you’ll be taking it now.
  • If however you don’t need the income, why would you take it now? If you are pre-60 and don’t need the income, it may make more sense to leave the pension alone, leaving it invested for the long term, and avoid unnecessarily drawing taxable income from the scheme, until closer to the time when you WILL actually need that income.
  • Even after EFTE, if you have other income sources such as rental income, that generate income that pushes you into the higher tax bracket, and you don’t need the income from this pension, why take it? If you are under 70/75, you are not obliged to take any lump/income from the pot. So why take it?!
  • If you don’t have such levels of other incomes, but you have large sums of cash sitting on deposits which you have no plans for, it may be wise to consider using those assets before starting to take your pension. This is particularly the case if your pension income is likely to cover all your on-going living costs once you EFTE. When you consider that you have most likely already paid Income Tax, Inheritance Tax or Capital Gains Tax on the money you have in your Deposit Accounts – why not enjoy these assets (while retaining a sizeable float), before drawing down and paying Income Tax on the pension benefits!?
  • Don’t forget to include State Pensions into your calculations of course! Imagine you are 62 years of age, have living expenses of say €55k to €60k per year, have €1m in pension pots, have no other incomes once you EFTE, and you have €400k of cash/deposits. You could argue that the optimal approach here is to leave the pension alone and invested, use €300k of your €400k savings to cover your lifestyle costs for the next 5 years until State Pensions kick-in. At 67, you then start drawing 5% from the €1m to generate €50k, which on top of yourself and your spouses’ State Pension income of €20k Gross will see you generate €70k Gross per year. After-Tax, this will be sufficient to cover your lifestyle expenses in most years – which can also be subsidised with the €200k savings you still have on Deposit where you spend bigger etc. This is obviously a basic example to show how one could begin to formulate the basis of a plan for themselves – and considerations around drawing 5%, survival rates, fee and tax rates, investment approach, sequence risk etc. etc. all need to be considered as part of that planning. But it might help you start thinking about the role State pension income may play in your future incomes
  • Pension rules change all the time – usually for the better (though they do often cause confusion!). A recent change has meant that if you have more than 15 years’ service within a DC scheme, you can now, if you wish, transfer the scheme value to one or more PRSAs. This new route can give you another way to be more tax efficient in draw-down and preserving benefits for beneficiaries, as you can draw PRSAs at different stages totally independently of each other, right up to 75! Read Blog 190 for more on this. See Pensions Authority also for more

Investment/return factors to consider

As one if approaching the time where they will exit work, they will frequently be wondering ‘When To Take My Pension’ and they tend to begin to pay very close attention to the performance of the funds they are invested in, and understandably so! However, that is not necessarily the right thing to do. Provided of course that you are invested appropriately in the fist instance, the market conditions at the point you are about to take your tax free lump sum or first income from pension, ought not be a huge concern for us. Ideally, if you plan to take a tax free lump sum, you will be able to sell that large portion of your pension assets at a price that you consider to be ‘high’, relative to what it has been at in recent years. What many tend to forget is that even if they do sell that large chunk during a temporary market decline of say 20%, they are still most likely selling these assets at multiple of what they bought them for, averaged over past decades of accumulation! Of course, that wouldn’t make it an easier pill to swallow, but it ought to help ease the pain somewhat!

We have written about it extensively over the years here, but ensuring your portfolio allows an element of flexibility as to which assets or buckets within your pension are sold at specific points in time is a key tool to have on one’s quiver when drawing-down. If you did happen to want to take a tax free lump sum at a time when equity values were depressed, being able to NOT sell the equity and instead sell some of the more defensive assets within your portfolio can be a useful approach. Not all schemes allow this level of flexibility, even if you hold more than one fund within your scheme, so worth checking this out if you like the idea.

The approach you are taking with your investment portfolio within the pension ought to be in line with your plan for a sustainable draw-down. As-in, how many years away do you plan to take any lump sums, and start the income draw-down of 4/5/6% etc. It’s not necessarily complicated, but does require some planning, analysis and agreed approaches to help you stick to your plan. Read Blog 120 for a detailed look at spending strategies and draw-down approaches.

‘When To Take My Pension’ – Personal Factors

In The USA, it is apparently entirely up to you whether you take draw-downs from an IRA (Individual Retirement Account). A study quoted in the WSJ stated that about one-quarter of retired households in the US withdrew funds from traditional IRAs in 2020. Only one-quarter, which suggests that the other 75% had sufficient after-tax income/resources to cover their lifestyles. Interestingly, the reason the one-quarter took the withdrawals were for the following reasons, by percentage:

WSJ Report on IRA draw-downs in 2020, for 2019 tax year

If the above is any sort of a representation of what people will/do spend their pension incomes/lump sums on here in Ireland (from my experience, its not any different!), we will expect to spend approx. half of our pension incomes on Needs (basics of living) and half on Wants (nice stuff!). So, if you have a large untapped pension pot and you need to access it to buy the boat or gift a chunk to a loved-one, then you might just crack that cookie-jar sooner than later and deal with any consequences later. Or you might be of the more conservative approach and refrain for another few years so as not to put your pot sustainability in danger? That balancing act is what we strive to help people to achieve’ enjoy the pension proceeds fully without endangering the longevity of it for later decades.

A Final Word:

Tax, Investments, pension Rules are all fine and well, but at the end of the day you might say to hell with it – give me my money – and I don’t blame you. It’s nice to finally turn on that tap of retirement income, to realise the rewards for decades of patient and diligent saving of hard-earned cash. You might be hugely thankful to be in a position to be taking a large and sustainable income and paying whatever tax is due – you might see that as a privilege. If that is your mindset, I admire you, and I think it too is a great way to look at it all!

Hope it helps.

Paddy.

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