Five things you need to know before touching your pension in 2024

For thousands of people, 2024 will be the year they can finally start taking money from their pension. Decades of diligent saving builds to one moment – midnight on a 55th birthday, when pension rules allow you to dip into your nest egg for the first time.

But taking your pension as early as possible may not be wise, especially as tax rules around your nest egg could change soon.

Timing your retirement could mean the difference of thousands of pounds in your income – here are the five things you need to know before making the decision to retire this year.

1. Interest rates could fall this year

For the past two years, interest rates have risen at a pace not seen in decades – pushing up the value of annuity pension deals. But this could be about to reverse.

The Federal Reserve, the American central bank, has already signalled that it could cut rates this year, and the market is starting to price in a high chance of it doing so in March. Economists think that the Bank of England and European Central Bank may follow suit, with early signs that economic growth is starting to slow and inflation is also easing.

This could eventually trickle down into the annuity market. Annuities exchange a cash lump sum for a guaranteed income until death. Last year, their pay rates soared thanks to higher interest rates and rising yields on government debts.

A fall in interest rates could reverse this trend, so anyone who is planning on relying on annuities to cover a bulk of their retirement needs should shop around sooner rather than later. You can read our full guide on annuities here.

2. A bond boost

The investment giant Goldman Sachs has named 2024 “the year of the bond”. After a torrid year in 2022, the market rallied last year. Economic growth is beginning to slow, and with expectations that interest rates could fall this year, the returns that investors can secure from fixed income looks very attractive.

A further rally in the bond market could act as a boost to your pension, especially if you are an older saver with a “lifestyled” pot. This is when your fund manager moves your money away from stocks and into assets that are perceived as lower-risk, which usually means bonds.

While you are in drawdown, your pension remains invested and so can continue to benefit from a rally in markets – however, any lump sum that is withdrawn could miss out on returns.

3. Determine how much money is right for you

Retirement planning can be an overwhelming mess of numbers, assumptions and estimates. If you are unsure where to begin, it is best to start backwards from how much money you think you will need to live in retirement each year.

This includes your essential spending, such as household bills, and discretionary spending, such as holidays. In retirement you may pay slightly less income tax, and no National Insurance or pension contributions.

As a rough guide, someone who wants a “comfortable” retirement needs at least £37,300 a year, assuming that they have no housing costs. You can check if your pension is on track to generate this level of income here.

4. Don’t pay unnecessary tax

The only part of your pension that is tax-free is the lump sum, which is limited at 25pc of your pension and at an absolute maximum of  £268,275. The remaining three-quarters of your pension will be taxed like regular income.

Jonathan Watts-Lay, of the advisers Wealth at Work, said: “Unfortunately, some people don’t understand this and decide to take their pension as a cash lump sum, not realising that it makes them a higher rate taxpayer.

“It may be better for them to take smaller amounts each year from their pension, keeping within their tax bracket, and then top it up with withdrawals from other savings.”

5. What to do with your pension if Labour wins

Last spring, Chancellor Jeremy Hunt announced he would abolish the cap on retirement savings at £1.073m. The removal of the “lifetime allowance” has been extremely beneficial for wealthier savers who had amassed pots worth more than £1m – but Labour has hinted that it could reverse Mr Hunt’s decision if it comes into power.

A general election is expected to be held towards the end of 2024, which means Labour – who are well ahead in the polls – could come into power in the next tax year.

The reintroduction of the lifetime allowance could hit as many as 250,000 people, according to estimates from the consultancy LCP.

Before the end of this tax year in April, remember that the tax-free lump sum remains limited at 25pc of the old cap, or £268,275. It may be higher for those who registered for fixed or enhanced protection – you can read our full guide here.

Normally, the lifetime allowance is triggered by “benefit crystallisation events”. These include taking an annuity, moving your pension into drawdown and turning 75. If Labour reintroduces the charge, any of these events could land you with a significant tax bill in 2025.

Some worried savers are already starting to cash in their pensions to avoid any chance of this happening.

However it is worth noting that when you crystallise your pension, the amount you can contribute to it each year is limited to £10,000, the money purchase annual allowance or “MPAA”.