Retirement can be complicate, but it needn't be.
This used to be a lot easier. You finished work at 65 and took your state and possibly your work pension. Now you have lots of choices to make.
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Do Nothing
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Guaranteed Income
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Flexible Income
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Take it as Cash
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Mix and Match
Do Nothing
Leave it for now
You can decide to take no action, and leave the pension alone, and still pay into your pension if you want to.
As long as your money stays in your pension you won't usually pay tax on it.
By leaving your pension this means that it might grow, and could give you more to retire on when you finally retire.
Considerations
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You will have to manage on your current income.
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Inflation may impact the value of your pension savings.
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You leave the pension funds at risk. Even if kept as cash, the real value of the pension is likely to fall. Trying to predict how well your policy will perform isn't easy.
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If you don't start your pension before your 75th birthday, there could be a tax charge
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Be careful that you do not loose out on any guarantees on your pension, which often require you to draw the pension as a specific age or date
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Charges for managing the fund will continue to be applied whilst your money remains invested.
Guaranteed Income
An Income for Life
A Guaranteed income for life, known as an annuity.
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You could be paid a set amount when you want for the rest of your life, so you'll know exactly how much you're getting and when.
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You know how much you'll be getting and when
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You could be paid an income for the rest of your life
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Take up to 25% tax-free.
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You may be able to combine two or more pension pots.
Decisions at the outset
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Think carefully about what type of annuity you want to go for. There are lots of annuity options that will affect your income.
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Once you've bought an annuity you can't normally change it, so you'll need to shop around to make sure youre getting the best deal. You don't have to buy your annuity from your existing pension provider and you may be able to get a higher pension income by shopping around.Â
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There's usually no lump sum to pass on when you die.
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The money you get from your annuity will be taxable.
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It may be years before you get back what you've paid in
Things to think about
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Think carefully about what type of annuity you want to go for. There are lots of annuity options that will affect your income.
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Once you've bought an annuity you can't normally change it, so you'll need to shop around to make sure you're getting the best deal. You don't have to buy your annuity from your existing pension provider and you may be able to get a higher pension income by shopping around.
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There's usually no lump sum to pass on when you die.
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The money you get from your annuity will be taxable.
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It may be years before you get back what you've paid in
Shop Around
Always shop around to get the right type of annuity for you, and your dependents. Companies offer very different rates depending on the choices you make.
For example, if you have certain health conditions or have made particular lifestyle choices which may lower your life expectancy, you might get up to 50% more income by taking an enhanced annuity in comparison to a standard annuity.
Flexible Income
Flexible Access to your pension
With flexible access to your pension pot, you could:
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take your money as a series of lump sums
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take 25% of it tax-free
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leave the rest invested so it can potentially grow
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pass on the money left when you die
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run out of money if you don't budget properly
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reduce the maximum amount you can save into pensions.
Unlike an annuity, these options will not provide you with a guaranteed income for life, although Flexible Access Drawdown can provide a regular income. You could run out of money if you withdraw too much or if your investment performs badly. You should continue to review the value of your investment regularly and make changes if necessary.
Things you should consider
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You could run out of money if you withdraw too much or if your investment performs badly. You should continue to review the value of your investment regularly and make changes if necessary.
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By taking money in either of these ways, it may impact on any means-tested benefits you receive.
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With most investment products, costs and charges apply which could have a negative effect on your policy value over time. If you need to transfer to a new policy to get flexible access to your benefits, the charges under this new policy may be higher or lower than the product you already have. If you would like more information on how this may impact you, please call us.
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These options have different tax implications, which could mean you receive less money than you expected. We may initially have to use an emergency tax code which could mean you pay more tax at the outset than you originally expected. Please call us if you need more information, or contact HMRC for further guidance.
Leaving your pension to your dependents
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When you take out an annuity you give up access to the lump sum. Should you die your pension pot dies with you, although you may take out a dependents pension or a guaranteed period where payments will continue.
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With a drawdown pension the cash remains yours. The death benefits depend on your age:
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If you die before 75 the pension is paid tax free to your beneficiaries who can take it as an annuity, a lump sum or through flexible drawdown
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If you die age 75 or older – your pension pot can be paid to your beneficiaries either as a lump sum or through flexible drawdown. All payments will be subject to income tax at their marginal rate.
Take it as cash
Why not just take all the money as cash?
From 55 you can take all the money as a lump sum, or as a series of lump sums whenever you need it. Usually the first 25% will be tax free, the rest will be taxed along with any other income you have
And the rub is?
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You will need to consider what income you will need for the rest of your life. And withdrawing a large sum could trigger a big tax bill.
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Make sure that by withdrawing the full cash sum you won’t miss out on any special features that your pension policy offers. For example if your pension has a guaranteed annuity rate (GAR), it could give you a higher level of income from an annuity. You should check with your provider or Independent Financial Adivser whether you have one and how it works.
The tax question
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The money you take could push you into a higher tax bracket, meaning you will pay tax at a higher rate in the year you take the cash.
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The taxable 75% (along with any other income) may push your total income for the year into the higher 40% tax rate, or into the 45% band if your total income is over £150,000 and you may pay more tax on all of your income
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You could take the cash in stages, making the most of your annual tax allowances, or keeping your income below the higher rate threshold.
Other considerations
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If you take out smaller chunks the money in your pension will remain invested, so the value could go up or down, and you will still be paying charges on your pension.
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Whilst it is in your pension the money is outside your estate for Inheritance Tax Purposes. You will need to consider the effect of withdrawing a large sum from your pension on your Inheritance Tax liability.
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A lump sum might also affect any other state benefits you are entiled to.
Mix and Match
Combining your options
You can combine the options available to you. For example, some people take an annuity to guarantee their fixed payments: rates, housekeeping etc, whilst using drawdown to cover other expenses, such as holidays, presents, cars.
Considerations
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The value of any money left invested can go down as well as up. So you may not get back what you've put in.
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Not all providers offer all options and/or the ability to combine them.
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By combining options you may increase the number of charges you have to pay.
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There may also be penalties so be sure to check.
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Mixing your options is complicated, so you should consider speaking to an Independent Financial Adviser before proceeding.
