If you’re ready to decide what to do with your pension or you just want to understand what your options are when you turn 55, this blog has been written to help you.
With new pensions freedoms in effect, you may not be aware of what’s available. Previously, people had to wait until retirement to access their pensions, but legislation that came into force in April 2015 has brought that forward to 55. This document does not include all options for taking funds from your pension, but will help you learn about how you can access your pension.
Are you 55 and do you want to draw on your pension?
Depending on your age (and whether you’ve paid your National Insurance contributions) you may have to wait for your state pension. But if you’re 55 (and depending on the type of pension you have) you may be able access your pension and use the money to retire, supplement your salary, or allow yourself to work fewer hours. You can use a free government service to check your National Insurance contributions here.
Can you wait?
You don’t have to take your pension and it should be stressed that the primary role of a pension is to provide income in retirement. Lots of people continue to build their pension pot so that they will have more money for when they retire. However, when you reach 55 more options will be open to you, so it’s a good time to review your finances and see whether you’re on track. You may wish to contact a financial adviser to help you map your onward financial journey – especially if you have multiple pension pots.
Your choice
When it comes to planning for retirement, it’s easy to feel overwhelmed. This table is a quick tool to help you compare your options. If you’d like to know more about each of these options, you can find out more on the following pages.
Income options for your pension under the new rules
| Your options | Tax-free cash? | Regular income? | Guaranteed income? | Can I run out of money? | Will my tax rate go up? | Can unused funds be used to provide an inheritance when I die? |
|---|---|---|---|---|---|---|
| An annuity | Up to 25% of fund | Yes | Yes | No | Unlikely, as income is planned in advance | Depends on the plan |
| Flexi-access drawdown | Up to 25% of fund | Yes | No | Yes | Unlikely, as income is planned in advance | Yes |
| Take the whole pot | Up to 25% of the fund | No | No | Yes | Likely | No |
| Take lump-sums | 25% of each withdrawal | No | No | Yes | Depends on the size of lump-sums | Yes |
From which.co.uk
Select these tabs to find out more:
“I want to reinvest my money, or have quick access to it”
You don’t have to take your pension as regular income, you can choose to withdraw it and convert it to cash. You can take up to 25% of your total fund tax-free, but the rest is taxable and could push you into a higher tax band. Always consult an independent financial adviser before accessing your pension as you could face a tax bill and lose the tax-free advantage of pension savings.
Remember, if you choose this option it will be up to you to manage your spending and ensure that you have enough income to last for the whole of your retirement.
“I want to take varying amounts of money from my pension”
There are lots of different ways to take money from your pension. Some pension providers allow you to keep your pension pot invested, but take out lump-sums when you need them. You can access your pension all in one go taking 25% tax-free, or take multiple lump sums with 25% of each withdrawal tax-free. This is known as UFPLS (Uncrystallised Funds Pension Lump Sum). Taking lump sums from your pension will reduce the size of your overall fund, and potentially lessen the amount you can take in the future.
“I want a guaranteed income for life”
Annuities provide guaranteed regular retirement income and allow you to budget effectively. Annuities are the traditional option for retirement – but no longer the only choice. There are lots of different types of annuities and choosing the most appropriate one will depend on:
- your circumstances (including if you’d like a joint annuity with your partner)
- your health (even if you suffer from a minor ailment like asthma, you could receive higher monthly payments with an Enhanced Annuity)
- your attitude to risk
- whether you wish to provide any funds when you die
Most ‘traditional’ annuities don’t allow unused funds to be used as inheritance, but now annuities can be arranged with additional features. We recommend talking to a financial adviser if you think you’d like to discuss whether an annuity is the right option for you, and how you can ensure that it is the most suitable fit you and your circumstances.
If you feel you would benefit from accessing funds when you’re ready to draw your pension, you can take a 25% lump-sum and use the rest to buy an annuity. If you’d like to know more about combining different options, see ‘Flexible drawdown’ and ‘Mix it up’.
“I want to take money out flexibly, as and when I want”
With a flexi-access drawdown scheme your pension fund can remain invested in shares, bonds and so on, allowing you to draw regular income from it by cashing in some of those investments. Each time you move money into drawdown, up to 25% can be taken as a tax-free lump-sum. The remainder stays invested and taxable income can be drawn directly from the pension as you wish.
While you’ll be able to choose when and how much to take out of your pension, it will be up to you to manage your spending and ensure that you have enough income to last for the whole of your retirement. Unlike most annuities, the money that is left in drawdown when you die can be passed on.
You don’t have to choose just one option – you can mix and match different products to provide cash and a regular income. But which combination is suitable for you will depend on your circumstances and appetite to risk – which is where a financial adviser can help.
- One lump-sum
-
“I want to reinvest my money, or have quick access to it”
You don’t have to take your pension as regular income, you can choose to withdraw it and convert it to cash. You can take up to 25% of your total fund tax-free, but the rest is taxable and could push you into a higher tax band. Always consult an independent financial adviser before accessing your pension as you could face a tax bill and lose the tax-free advantage of pension savings.
Remember, if you choose this option it will be up to you to manage your spending and ensure that you have enough income to last for the whole of your retirement.
- UFPLUS
-
“I want to take varying amounts of money from my pension”
There are lots of different ways to take money from your pension. Some pension providers allow you to keep your pension pot invested, but take out lump-sums when you need them. You can access your pension all in one go taking 25% tax-free, or take multiple lump sums with 25% of each withdrawal tax-free. This is known as UFPLS (Uncrystallised Funds Pension Lump Sum). Taking lump sums from your pension will reduce the size of your overall fund, and potentially lessen the amount you can take in the future.
- Annuity
-
“I want a guaranteed income for life”
Annuities provide guaranteed regular retirement income and allow you to budget effectively. Annuities are the traditional option for retirement – but no longer the only choice. There are lots of different types of annuities and choosing the most appropriate one will depend on:
- your circumstances (including if you’d like a joint annuity with your partner)
- your health (even if you suffer from a minor ailment like asthma, you could receive higher monthly payments with an Enhanced Annuity)
- your attitude to risk
- whether you wish to provide any funds when you die
Most ‘traditional’ annuities don’t allow unused funds to be used as inheritance, but now annuities can be arranged with additional features. We recommend talking to a financial adviser if you think you’d like to discuss whether an annuity is the right option for you, and how you can ensure that it is the most suitable fit you and your circumstances.
If you feel you would benefit from accessing funds when you’re ready to draw your pension, you can take a 25% lump-sum and use the rest to buy an annuity. If you’d like to know more about combining different options, see ‘Flexible drawdown’ and ‘Mix it up’.
- Flexible drawdown
-
“I want to take money out flexibly, as and when I want”
With a flexi-access drawdown scheme your pension fund can remain invested in shares, bonds and so on, allowing you to draw regular income from it by cashing in some of those investments. Each time you move money into drawdown, up to 25% can be taken as a tax-free lump-sum. The remainder stays invested and taxable income can be drawn directly from the pension as you wish.
While you’ll be able to choose when and how much to take out of your pension, it will be up to you to manage your spending and ensure that you have enough income to last for the whole of your retirement. Unlike most annuities, the money that is left in drawdown when you die can be passed on.
- Mix it up
-
You don’t have to choose just one option – you can mix and match different products to provide cash and a regular income. But which combination is suitable for you will depend on your circumstances and appetite to risk – which is where a financial adviser can help.
Getting advice
Face-to-face financial advice is becoming increasingly important at a time when it’s becoming harder to find. We’re committed to helping you save money, buy your own homes and plan for a more secure financial future – whatever challenges life throws at you.
Our independent financial advice helps our clients to achieve their financial goals. Our aim is to support you throughout your financial journey – so you can make the right decisions with confidence to grow your wealth and protect yourself, your loved ones, and your legacy.
The Financial Conduct Authority does not regulate taxation and trust advice.
Accessing pension benefits early may impact on levels of retirement income and is not suitable for everyone. You should seek advice to understand your options at retirement.
You should not view any of the information contained within this booklet as advice. Please remember that current tax benefits depend on individual circumstances and rates of tax relief may be altered or withdrawn without notice. The value of investments may go down as well as up and are not guaranteed
Sources:
https://www.moneyadviceservice.org.uk/en/categories/pensions-and-retirement
http://www.which.co.uk/money/pensions-and-retirement
https://www.moneyadviceservice.org.uk/en/articles/pensions-and-retirement-jargon-buster
http://the7circles.uk/pension-drawdown-ufpls-uncrystallised-funds-pension-lump-sum/
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