Freedoms to gain accessing your pension pot
Changes to pension rules introduced in 2015 mean you’ve now greater access to your pension. It might seem like a far off prospect but knowing how you can access your pension pot can help you understand how best to build for the future you want.
Under government rules you have a range of choices for how you use your pension money if you have a defined contribution pension and are aged 55 or over, you now have the freedom to choose how you take your pension. What you choose is up to you, but we can help you to understand how it works and what’s possible. You can usually take 25% of your pension as tax-free cash whichever option you choose.
How to take your pension
There are several ways you can take your pension. But with the increased choice it can often mean increased confusion. When considering how you’ll take your pension, think ahead about how much you might need to live on in retirement – and how you’ll make your money last.
With all of the options, you can normally take up to 25% of your pension pot as a tax-free lump sum if you wish to do so. The rest will be taxed as an income as and when you receive it, so look at the tax implications of each option carefully.
So what are your options?
Receive a secure, regular income for life with an annuity
If you want to use your pension to provide a guaranteed regular income for life, you can purchase an annuity with your fund. There are different types of annuity to choose from, with income options to suit your needs, perhaps those of your partner when you die – or maybe an increased income if you or your partner have certain health conditions.
Receive a flexible income with a flexi-access drawdown plan
Drawdown lets you have access to your pot as you need. You take flexible cash amounts from your pension pot, while the rest stays invested. But like any investment, the value could go down as well as up and you may not get back what you put in. Any money you have left in the fund can be passed on when you die.
Take your money as cash
You can do this all in one go, or as a series of smaller lump sums, whilst the rest remains in your pension fund. If you opt for smaller lump sums without taking your tax-free cash up front then each payment will be 25% tax-free. The remainder will be added to your income for the year and taxed accordingly. This could result in you paying a higher rate of tax.
Combination of options
It may be possible to mix and match what you do with your pension pot at different points in your retirement. Before combining any options though, take time to think about the benefits and considerations of each option on its own. You’ll need to check with your providers to see that you’re not losing out on any guarantees on your plan by combining options.
Leave it where it is
If you don’t need the money just yet, you could leave it invested for now. As long as your money stays in your pension pot you won’t pay tax on it and you’ll get tax-relief on contributions you make into your plan. There’s no guarantee you’ll get more when you take your money out, as your fund value can go down as well as up while it remains invested, and so you may not get back what you put in. You should also check with your provider to find out about charges and penalties.
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. PENSIONS ARE NOT NORMALLY ACCESSIBLE UNTIL AGE 55. YOUR PENSION INCOME COULD ALSO BE AFFECTED BY INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS. THE TAX IMPLICATIONS OF PENSION WITHDRAWALS WILL BE BASED ON YOUR INDIVIDUAL CIRCUMSTANCES, TAX LEGISLATION AND REGULATION, WHICH ARE SUBJECT TO CHANGE IN THE FUTURE. THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED. PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.