When can I take my pot?
Hello again, one and all!
For most people in most pension plans (including you in the RMDCP), the earliest that you can take your benefits is age 55 (unless you are in ill health). However, the expectation is that most members will take their benefits around age 65. Unless you tell us otherwise, your retirement age is set at 65 and all contributions are invested in an investment strategy which changes the risk reward profile depending on how many years you are from age 65. You can change your retirement age simply by filling in a form.
Do many people take benefits at 55? If so, is it sensible to do so?
The age at which you take your pension pot is an individual choice. The longer you leave your money invested, the higher the expected returns. The investment strategy slowly reduces the risk as you get closer to your retirement age as the pot is at its largest, and the time to recover from any falls in value is shorter.
More people are staying invested beyond their retirement age and we’ve introduced the Flexible Retirement Lifecycle for those people. Whilst the Diversified Bonds Fund has done well in the Default strategy, inflation is rising and that can eat into the purchasing power of your money. The Flexible Retirement Lifecycle has a higher risk and reward profile than the Diversified Bonds Fund but it has a broad mix of assets so in times of stress it won’t fall in value as much as the equity funds (that have high risk and reward).
A recent survey by Legal & General Investment Management of 1,500 members found that 33% (a third) of women, and 22% (more than a fifth) of men had taken the maximum tax-free cash at age 55. This is much higher than what we are seeing in RMDCP.
Perhaps even more surprising is that the research found that more than half of people who took money from their pot early said that they didn’t need that much at the time. Did you know you can take just some of your pot, you don’t need to take the whole pot in one go? This is called a “partial UFPLS”. I call it “taking a chunk”. You can take two chunks each year without paying a fee. 25% of this is tax free and the rest is taxed as income. If you are careful, you can minimise your tax bill. More info is in my Beat the Taxman blog, please have a read of this if you are thinking about taking money out of your pot.
Around 1 in 4 of the people that accessed their money early put the money in a savings account, current account, or cash ISA returning very little interest.
So, if you don’t need the cash in your 50s, why not consider leaving it invested for longer in the RMDCP (or other pension plan) where there is the potential for growth and the chance to keep up with, or beat, inflation? If so, you might find that the Flexible Retirement Lifecycle suits you better.
What does the government think?
In 2028 the State Pension age will have nudged up to age 67. Also, the earliest age for taking benefits from many pension schemes, which the government refers to as the Normal Minimum Pension Age (NMPA), will have jumped from age55 to 57.
The rise in State Pension age mirrors the rise in how long people are expected to live.
The government has stated that the rise reflects changing expectations of how long we will remain in work and in retirement. “Raising the NMPA to 57 could encourage individuals to save longer for their retirement, and so help ensure that individuals will have financial security in later life”.
Let me know what you think! Did you know about the new Flexible Retirement Lifecycle, which might suit people who want to stay invested but still take small chunks from their pot?
Meanwhile, I wish you all the very best.
Ben