It's all about optimisation
It is important to consider the order in which you spend your retirement funds in order to get the most out of your total savings. The optimum order depends on your needs, the return potential of your funds, tax matters and public benefits. On top of this, you also need to bring your partner’s financial situation into the equation. Below is an example of a spending order:
- Early retirement pension (provided that you have saved for early retirement and that you stop working before reaching the public retirement age)
- Public retirement pension, ATP and any early retirement premium and tax credit
- Available funds
- Pension funds (incl. any LD)
- Frozen property tax
- Home equity loan
Book a consultation to ensure the optimum spending order
You can use the above as a rule of thumb, but individual conditions may imply that the spending order should look different. Therefore, it is a good idea to consult a pension adviser regularly in order to ensure that your plan is continuously optimised to match your life.
First, lifelong pensions
You should break into your lifelong pension as soon as possible. Lifelong pensions are a good way to ensure that you can make ends meet for as long as you live. Together with public retirement pension, lifelong pensions provide a financial foundation that allows you to spend other pension savings and available funds without the fear of running out of money.
If home equity forms part of your pension savings, you should consider setting up an offset mortgage account while you can – meaning while you are still working. It may also be worth considering refinancing your mortgage.
Often, available funds carry a low rate of interest and the returns are heavily taxed. Therefore, these funds should be spent before any endowment pension and LD funds.
Flexible instalment pensions
You can postpone or prolong the payouts form your instalment pension. This way, you can optimise your savings so that you may still receive the public retirement pension supplement and, at the same time, reduce the amount subject to the highest tax rate and equalisation tax. For instance, if you prolong your 10-year instalment pension to 15 or 20 years, you may be able to completely avoid having to pay the highest tax rate as a retiree. If your income tax rate is below 40 % as a retiree, or if you do not need a large lump sum when you retire, it may be a good idea to change your endowment pension to a life pension or an instalment pension and thus spread the payouts over, for instance, 10 years or the rest of life. Please note that regular payouts are set off differently against public retirement pension, early retirement pension, etc. than lump sum benefits.
Endowment pension and old-age savings
Endowment pensions and old-age savings can be paid out all at once, or you can leave the money with PFA until you need it. This way, your savings will continue to generate returns. You can also choose to reinvest the money through PFA Bank and get a strong return potential along with flexible payout options.
It is also possible to split the payout into smaller portions or convert the endowment pension to an instalment pension. This may be a good idea if you do not pay the highest tax rate and don't stand to lose the public retirement pension supplement. You can also use the money to pay down your mortgage – however, this may involve a risk if the terms for mortgage loans change and you are planning to turn property value into cash at some point in time. Some also choose to reinvest the money (after taxes) in a life pension.