After decades of saving, you may have finally reached the year when you had always planned to retire. But there are a few key factors you might want to consider before doing so. 

Understanding changes to taxes and allowances, life expectancy predictions, and the importance of planning your withdrawals sustainably are all integral to ensuring that you get the most out of your pension and achieve the retirement you’ve always wanted.

So, here are five things you should know before touching your pension in 2024.

1. The Money Purchase Annual Allowance has changed

The Annual Allowance is the maximum amount you can contribute to your pension in a single tax year without facing an additional tax charge. 

In the 2023/24 tax year, the Annual Allowance for most people is either £60,000 or 100% of your earnings, whichever is lower. This includes money you contribute in addition to any payments made by your employer and tax relief. 

However, once you flexibly access your defined contribution (DC) pension, you might be subject to the Money Purchase Annual Allowance (MPAA), which reduces the Annual Allowance to £10,000. 

So, if you want to continue to contribute to your pension from earnings but you have already withdrawn from it (perhaps to supplement your semi-retired income), the amount you can contribute tax-efficiently from your earnings is limited.

So, if you plan to continue to work – perhaps part-time or by setting up your own business – the amount of tax-efficient pension contributions you can make from your earnings may be limited by the MPAA.

2. Your pension may need to last longer than you planned

Life expectancy has been rising for generations. If you retire today at the minimum pension age of 55, you can expect to live for around another 30 years on average.  

In the years to come, life expectancy is predicted to continue rising. While the pension age will also increase, it is unlikely to do so in line with rising life expectancy. This means that pensions may have to last even longer than they already do today.

If you plan to draw from your pension in 2024, you’ll need to think about whether you have enough to sustain your desired lifestyle for the rest of your life. Your fund may have to last you for 20, 30, or even 40 years.

Working for just a couple of extra years can significantly boost your pension, particularly if you have paid off your mortgage and your children have left home.

Actuarial Post reports that a 60-year-old who retires with a pension worth £200,000 can expect to have a retirement income of roughly £4,900 a year. 

However, if they delay their retirement for one year and make workplace pension contributions of £200 a month, their fund could grow to around £211,000. Moreover, with one less year of retirement to fund, their pension could provide them with an income of around £5,700 a year, which is £800 more than if they retired at 60 (these calculations are based on pension growth of 4.25% a year after charges).

So, before you decide to touch your pension, make sure you have considered how long it may need to last and what the financial benefits of delaying your retirement for just a few years could be.

3. Make sure you don’t pay more tax than you need to

When you retire, you can usually take a tax-free lump sum from your pension. This is ordinarily limited at 25% of your total savings and, from 2024/25, capped at a maximum of £268,275. 

Withdrawals above your tax-free lump sum are normally added to your income for that year and taxed at your marginal rate of Income Tax.

If you take a large lump sum from your pension that exceeds the tax-free limit, you could push yourself into a higher Income Tax bracket. This might mean you lose 40% or 45% of your pension withdrawals to Income Tax.

Being strategic about when and how much to withdraw can ensure that you stay within a lower rate of Income Tax and keep more of your pension. 

So, before you dip into your pension, make sure you are clear on how much your tax-free lump sum is, and how to draw from your fund in the most tax-efficient way. Seeking advice from a professional can help in this regard. 

4. Take sustainable withdrawals

If you take unsustainable withdrawals from your pension or deplete your fund too quickly, you might find that you run out of money further down the line. As you read earlier, this is increasingly likely as life expectancy continues to rise and pensions need to last a lot longer.

It can be beneficial to seek advice before a significant financial decision, such as deciding when and how to access your pension.

For example, we use cashflow modelling to estimate what your finances will look like in the years to come. We can analyse data such as your income, assets, and outgoings, and factor in things like your retirement age, inflation, life expectancy, and investment growth to help you understand what your future finances might look like. 

Armed with this information, you can implement any necessary changes that will ensure your income remains sustainable and that you don’t run out of money in later years. 

5. The Lifetime Allowance is set to be abolished

Before 2023/24, the Lifetime Allowance (LTA) represented the total amount you could build up in your pension savings without paying an additional tax charge. 

However, in the 2023 Spring Budget, the chancellor announced that he was scrapping the LTA tax charge, and that the LTA will be abolished from 6 April 2024. This means there are no additional tax charges for drawing from your pension if it is above the previous LTA of £1,073,100.

So, if you’ve been limiting your pension contributions to ensure you stay within the LTA, you may want to revisit your retirement plan before dipping into your pension.

Get in touch

If you’d like to establish whether you’re on course for the retirement you want, or you’d like to review your progress towards your financial goals, please get in touch. 

Contact us by email at info@blueskyifas.co.uk or call us on 01189 876655.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. 

The Financial Conduct Authority does not regulate cashflow planning.