Pension Options Page

Flexi-access drawdown

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Financial Adviser, Andy King, discusses flexi-access drawdown.

Flexi-access drawdown is one of the pension fund options at retirement and can also be referred to as flexible retirement income, or flexible income drawdown.

Choosing the best way to use your pension fund is complicated so it is important to seek professional financial advice to help you understand your options and to make the best decisions for your hard earned pension pot.

What can I do with my pension pot

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Grow and protect your pension, both now and in the future.

For most, retirement will be funded in the main by a pension. It is therefore vital you have a robust plan in place that will allow you to grow and protect your pension, both now and in the future.

With ever-changing rules and regulations, we now have a pension system that is often difficult to navigate, putting many of using this as a savings vehicle.

When it comes to deciding how to use your pension pot, there’s no one ‘right answer’. The earliest you can start getting a Defined Contribution pension is usually when you’re 55 – you should check this with your pension provider. You might be able to get your pension sooner if you’re retiring due to ill health.

What are your pension options to consider?

Leave your pension pot untouched for now and take the money later

It’s up to you when you take your money. You might have reached the normal retirement date under the scheme or received a pack from your pension provider, but that doesn’t mean you have to take the money now. If you delay taking your pension until a later date, your pot continues to grow tax-free, potentially providing more income once you access it. If you do not take your money, we can check the investments and charges under the contract.

Receive a guaranteed income (annuity)

You can use your whole pension pot, or part of it, to buy an annuity. It typically gives you a regular and guaranteed income. You can normally withdraw up to a quarter (25%) of your pot as a one-off tax-free lump sum, then convert the rest into an annuity, providing a taxable income for life.

Some older policies may allow you to take more than 25% as tax-free cash We can review this with your pension provider. There are different lifetime annuity options and features to choose from that affect how much income you would get.

Receive an adjustable income (flexi-access drawdown)

With this option, you can normally take up to 25% (a quarter) of your pension pot, or of the amount you allocate for pension drawdown, as a tax-free lump sum, then re-invest the rest into funds designed to provide you with a regular taxable income. You set the income you want, though this might be adjusted periodically depending on the performance of your investments. Unlike with a lifetime annuity, your income isn’t guaranteed for life, so you need to manage your investments carefully.

Take cash in lump sums (drawdown)

How much and when you take your money is up to you. You can use your existing pension pot to take cash as and when you need it and leave the rest untouched, where it can continue to grow tax-free. For each cash withdrawal, normally the first 25% (quarter) is tax-free, and the rest counts as taxable income.

There might be charges each time you make a cash withdrawal and/or limits on how many withdrawals you can make each year. With this option, your pension pot isn’t re-invested into new funds specifically chosen to pay you a regular income, and it won’t provide for a dependent after you die. There are also tax implications to consider that we can discuss with you.

Cash in your whole pot in one go

You can do this, but there are certain things you need to think about. There are clear tax implications from withdrawing all your money from a pension. Taking your whole pot as cash could mean you end up with a large tax bill – for most people, it will be more tax-efficient to use one of the other options. Cashing in your pension pot will not give you a secure retirement income.

Mix your options

You don’t have to choose one option: you can mix them over time or over your total pot when deciding how to access your pension. You can mix and match as you like and take cash and income at different times to suit your needs. You can also keep saving into a pension if you wish and get tax relief up to age 75.

Financial situation at retirement

It is important to sum up the pros and cons of taking an annuity vs drawdown.

The way you draw an income from your pension is likely to be largely determined by your financial situation at retirement. Will you, for example, still be paying of your mortgage, or do you have any other significant debts? What other income sources, aside from the State Pension, will you have at your disposal?

While an annuity can offer you the security of a guaranteed regular income, a drawdown plan gives you the chance to grow your pension and overall wealth during retirement. The latter route is likely to suit those with a stronger appetite for risk, as any significant market swings could potentially cause serious damage to your pension savings.

For more information on our pension planning services, please do not hesitate to get in touch to start your financial planning journey today.

Annuity vs Drawdown

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Ensure your retirement strategy meets your needs and goals

Pension annuities

Benefits Risks
Provides guaranteed income for life and cannot be affected by market fluctuations. If you pass away shortly after taking one, you won’t benefit from the full value you paid upfront.
Some policies guarantee indexation meaning the pension will rise with inflation over time. Rates tend to be lower when interest rates fall, so you may get less than you had hoped for when taking your pension.

Pension Drawdown

Benefits Risks
Offers more flexibility and money can be taken when it is needed. Markets can potentially be volatile and there may be no guaranteed income from investments.
Any money left in the drawdown pot will not be liable for Inheritance Tax. If too much is taken out of your drawdown pot, then you could face hefty tax bills.

Retirement planning services

It’s important that professional advice is taken before deciding upon a retirement strategy. The right strategy should be tailored to the individual’s needs and circumstances.

What is pension drawdown?

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Financial Planner, Amy Burge, explains what Pension Drawdown is, what pension planning services we offer and how she has helped a client with their pension planning.

Pension drawdown or annuity?

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Make sure your retirement strategy meets your needs and goals.

It’s important to make a well-informed decision when it comes to deciding what to do with your pension pot: drawdown, annuity, or a combination of both. Making the right choice will affect your retirement for many years.

Pension drawdown gives you freedom and flexibility, allowing you to choose your annual income, whereas annuities provide steady income and security. For those who want both, they can purchase an annuity with part of their pension whilst keeping the rest in a drawdown agreement – giving them the best of both worlds.

The decision of whether to use drawdown or annuities can be a complex one, and professional advice is essential. Depending on your circumstances, either option may be suitable, with some preferring the security of knowing their income will remain stable for life, while others find the greater flexibility of drawdown more conducive to their retirement plans.

Flexible access pension (drawdown)

Pension drawdown can provide more flexibility and control over how your money is managed in retirement. Drawdown is an increasingly popular option for retirees to receive an income during their retirement. This method of taking an income allows individuals to access their pension fund in a tax-efficient way, as withdrawals are only taxable when they exceed the Personal Allowance.

The main advantage of pension drawdown for retirees is that it offers more flexibility than other options such as annuities or lump sum payments. Retirees can take out whatever amount they require, when they need it, and don’t have to commit to fixed payments over time, allowing them the freedom to make their own decisions on how they wish to use their pension savings.

Another benefit is that any money left in the drawdown pot will not be liable for Inheritance Tax. This is beneficial for those who wish to leave a legacy for their beneficiaries, as the remaining investment can pass directly to them without being taxed.

On the other hand, choosing drawdown does come with some risks. Retirees should consider that markets can potentially be volatile and there may be no guaranteed income from investments. Withdrawing too much capital can also leave you exposed should you live longer than anticipated. It’s important that individuals understand how they plan to invest their pension savings and how any losses or gains might affect them in future years. Additionally, if retirees take too much out of their drawdown pot, then they could face hefty tax bills.

Overall, it’s important that professional advice is taken before deciding upon a retirement strategy. While drawdown can offer more flexibility than other options, it’s important to weigh up all the pros and cons before deciding. Ultimately, the right strategy should be tailored to the individual’s needs and circumstances.

Pension Annuities

In contrast to drawdown, pension annuities provide a guaranteed lifetime income, but they also carry risk; if you die shortly after taking out an annuity it means that you won’t benefit from the full value that you paid for upfront. This can make them unsuitable for those with shorter life expectancies compared to those who are expected to live longer. The current rates available on annuities may be attractive when compared to those in the recent past, and this can be an incentive for those previously deterred by low returns.

The benefits of an annuity include long-term security, since the income is guaranteed for life and cannot be affected by fluctuations in investment returns or other market factors. Plus, some policies guarantee indexation which means that the pension will rise with inflation over time. This helps to ensure that retirees have sufficient funds to maintain their lifestyle going forward.

However, there are also downsides to consider when deciding whether an annuity is right for you. Annuity rates tend to be lower when interest rates fall, so you may get less than you had hoped for when taking your pension. Plus, the income is fixed and cannot be adjusted, so if your circumstances change in retirement and you require more funds it may not be possible to increase the amount you are receiving.

Ultimately, professional advice should always be sought with an annuity purchase as there can be a number of factors that need to be taken into consideration before making a decision. It is important to fully understand the terms of the policy and make sure that it is suitable for your individual situation before committing to anything long-term.

Combination of drawdown and annuities

For some people, a combination of pension drawdown and annuities may provide the best balance between security of income and control over withdrawals – we can help to determine which option is most suitable for you. Ultimately, it’s important to understand all aspects of both drawdown and annuities, including the pros and cons of each, before deciding.

Making sound financial decisions requires due diligence and considering all relevant factors so that your retirement goals are met in the most efficient way possible. Therefore, it is important to consider both drawdown and annuities when planning for retirement, and professional advice is key to making an informed decision. With the right knowledge and professional advice, you will be able to decide as to which option is most suitable for your circumstances.

By considering all relevant factors, you can make sure your retirement strategy meets your needs and goals.

Our retirement planning services

As we all live longer and enjoy unprecedented freedom to decide our own retirement options, it has never been more important to have clarity over what you want to do and how much money you’ll need to achieve that.

Through our retirement planning services, we can help you position your finances so that you are confident of maintaining a good standard of living and have the income to realise your life goals, whatever they may be. For more information, please contact us.

Pension Myths

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Pension myths vs facts: Can your pension provide the lifestyle you want?

We have the answers to some of the myths around pensions so that you can maximise your retirement. To find out more about our pension planning services and our retirement planning services, please get in touch.

Busting the myths about pensions

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If you are approaching retirement age, it’s important to know your pension is going to finance your future plans and provide the lifestyle you want once you stop working. Pension legislation is extremely complex and it’s not realistic to expect everyone to understand it completely. But, since we all hope to retire one day, it is important to get to grips with some of the basics.

Many of us have made pension provision, but some of us don’t know very much about the details. To help you get a handle on some of the myths around pensions, we’ve got answers to some of the things you may have been wondering about. It’s particularly helpful to become aware of the things you may have thought were facts that are actually myths. Here are some examples.

Myth: The government pays your pension

Fact: The government pays most UK adults over the pension age a State Pension, which is currently:

  • Retired post-April 2016 full rate State Pension of £185.15 a week
  • Retired pre-April 2016 full rate basic State Pension of £141.85 a week (a top-up is available for some, called the Additional State Pension)Not everyone is eligible for the full amount, which requires you to have at least 35 qualifying years on your National Insurance record. If you have less than ten qualifying years on your record, you’ll receive nothing. Even if you receive the full amount, you’ll usually need to supplement it with your own pension savings.

Myth: Your employer pays your pension

Fact: Most people are automatically enrolled into a workplace pension. Your employer is usually required to pay a minimum of 3% of your salary into it and you must also pay a minimum of 5% of your salary. If you keep your contributions at the minimum level, it might be difficult to save enough for retirement.

As life expectancies grow longer, your retirement can be almost as long as your working life. It’s therefore important to put aside a portion of your earnings to create a pension pot that will enable you to receive the income and live the lifestyle you want during retirement.

Myth: You can’t save more than your lifetime allowance

Fact: There is a lifetime allowance on the benefits you can access from your pension, which is currently £1,073,100 (tax year 2022/23). That doesn’t mean that you can’t withdraw any more after that, but it does mean that you’ll pay a tax charge of up to 55%. However, it was announced in the Spring Budget 2023 that this will be abolished from April 2023.

Myth: Your pension provider’s default fund is suitable for everyone

Fact: Most pension default funds will start out with a high-risk strategy and steadily move your capital into lower-risk investments, such as bonds and cash, as you get closer to retirement. This is to reduce volatility in the value of your investments so that you can have a higher degree of confidence in how much you’ll eventually end up with.

If you don’t plan to purchase an annuity, you don’t necessarily need to reduce volatility before retirement. You may be leaving some of your money invested for several more decades, in which case a higher risk strategy may be more appropriate.

Myth: Annuities are outdated

Fact: There was a time when almost everyone bought an annuity when they retired, and that time has passed because there are now alternative ways to access your pension savings. But annuities still have a useful role for generating a retirement income and can be an appropriate product for some people. Unlike other pension withdrawal methods, such as drawdown, an annuity offers a fixed income for life, so there’s no risk of your money running out. That’s a crucial benefit for many pensioners.

Myth: You can’t pass on a pension

Fact: If you’ve used your pension savings to purchase an annuity, the income from this will usually cease when you die. But if you have pension savings that you haven’t used to buy an annuity (for example, if you’ve been taking an income through drawdown), what’s left can be passed on to a loved one. If you die before the age of 75 there will usually be no tax to pay by the beneficiary. Otherwise, they will need to pay Income Tax according to their tax band.

Get in touch

If you would like more information on our pension planning services or are looking for financial advice, then please book a chat.

What does Pension Drawdown mean?

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You can usually choose to take up to 25% of your pension pot as a tax-free lump sum when you move some or all your pension pot into drawdown, from the age of 55.

You will need to carefully consider where to invest the remaining 75% (or less if you have not needed to take the full 25%), taking your likely income needs and attitude to risk into careful consideration.

Find Your Local Adviser

How does pension drawdown work

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This video highlights the options that you could have at retirement, specifically Pension Drawdown, what it means and the things that you need to consider when planning for your retirement.

The Golden Years?

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Be better off in retirement

Imagine you’re retiring today. Have you thought about how you’re going to financially support yourself, and potentially your family too, with your current pension savings? The run-up to your retirement may feel overwhelming, but this is an important time for you and your savings.

Following the pensions reforms, there are now more options available than ever and this has removed the compulsion to purchase an annuity. It also means that you can use your pension fund to benefit your named beneficiaries, whoever they may be.

Basic retirement lifestyle

If you are approaching retirement it’s time to think about what you’re going to do with the money you’ve been working hard to save all these years. The average UK pension pot after a lifetime of saving stands at £61,897[1]. With current annuity rates, this would buy you an income of only around £3,000 extra per year from age 67, which, added to the maximum State Pension, makes just over £12,000 a year – just enough for a basic retirement lifestyle.

In more recent years, when it’s time to take a retirement income, some people are choosing to do so through pension drawdown. Pension drawdown provides a way to establish a flexible income, set at whatever level you choose, which can be increased or decreased over time to match your needs.

Flexibility and control

For many, this may seem a more fitting solution to their retirement needs than purchasing an annuity, which is a more established option that typically offers a set monthly income for life. However, although pension drawdown offers flexibility and control, there are differences to consider.

While annuity income is fixed for life, pension drawdown can only continue for as long as you have savings remaining – and once they’re gone, you’ll receive nothing. So, it’s important to receive professional financial advice to ensure that you withdraw your money at a rate that will last your expected lifetime.

Will your savings last a lifetime?

It’s important to consider that your retirement could last for 30 years or more, depending on when you retire and how long you live. This is why some people use pension drawdown as the option to provide their retirement income. Your savings remain invested even after you retire, which means they have the opportunity to continue growing through investment returns.

But it’s impossible to predict exactly how much they will grow each year. Some years they will grow more than others, and some years they may fall in value. If your rate of withdrawal exactly matched your growth rate, your savings could last indefinitely. But, because growth is so hard to predict, this is near impossible to do.

How much can you safely withdraw?

A 4% withdrawal rate is typically stated as a guide for how much you can withdraw each year from your retirement savings. This figure is estimated based on the history of the financial markets and how much investments have tended to grow over periods of around 35 years (the expected duration of retirement for someone who retires in their sixties).

So, if you have £500,000 in savings when you retire, 4% would initially equate to £20,000 a year.

However, there are a few additional details that mean this figure can’t be used totally reliably:

  • Past performance of the stock markets cannot reliably predict future growth
  • The performance of investments in your portfolio may be better or worse than average
  • It’s impossible to know for sure how long your retirement will last
  • Your financial needs are likely to change over time, typically peaking in early retirement and then in later life

Changing pensions landscape

So, a 4% rate of withdrawal could be either overly cautious, resulting in the accumulation of wealth that could create an Inheritance Tax
liability, or overly reckless, resulting in complete depletion of your savings when you still have years left to live.

In this world of ours, very little stands still. The same can be said for the pensions landscape. As high earners are faced with even more restrictions and potential pitfalls, it is vital to understand the rules and seek specialist advice. Start talking to us today about your future retirement plans and we can help you make sure it’s a resilient one.

Building a better retirement

If you’re approaching or have already turned 55, you might be wondering what is a good pension pot value to aim for. This will naturally
depend on your circumstances. To discuss your requirements, please contact us.