Ellis Bates Financial Advisers
Annuities – guaranteed income for life
Flexible retirement income – pension drawdown
Uncrystallised Funds Pension Lump Sum
Combination – mix and match
What can I do with my pension?Deciding how you want to start taking money.
Due to the changes introduced by the government in April 2015, when you reach the age of 55 (subject to change) you now have more flexibility than ever when it comes to taking money from your pension pot.
But before you do anything with your hard-earned cash, it’s important to take the time to understand your options, as the decisions you make will affect your income in retirement. Before you take money from your pension plan, it’s important to ask yourself if you really need it right away.
When and how you take your money can make a big difference to how much tax you might pay and how long your money will last.
Most pensions will set an age from which you can start taking money from your pension. They will also have rules for when you can
take your pension earlier than normal, for example, if you become seriously ill or unable to work.
When the time comes to start taking money from your pension, you’ll need to decide how you want to do this. If you’ve got a personal
pension or a defined contribution pension, you can take up to 25% of its value as a tax-free lump sum.
The remainder of your pension fund will be taxable and may either be taken as cash, used to buy an annuity (a guaranteed income for a
specific period or for the rest of your life), or you may leave the money invested and take withdrawals on a regular basis or as and when
you need.
With a defined benefits pension, you may be able to take some of its value as a tax-free lump sum, but this will depend on the rules of your scheme. The rest of the money will be paid to you as a guaranteed income for the rest of your life.
The different ways of taking your money have different levels of risk and security, and potentially different tax implications too. As with all retirement decisions, it’s important to take professional financial advice on what’s best for you.
Everybody’s situation is different, so how you combine the options is up to you.
Annuities enable you to exchange your pension pot for a guaranteed income for life. They were once the most common pension option to fund retirement. But changes to the pension freedom rules have given savers increased flexibility.
The amount you will receive depends on a number of factors, for example, how long the insurance company expects you to live and other benefits the annuity provides, such as a guaranteed payment period or payments to a spouse or dependent.
Annuities can also be for a specific period, not just for life. This can be useful if someone wants a guaranteed income for part of their retirement, say before the State Pension is payable.
When it comes to assessing pension options, flexibility is the main attraction offered by income drawdown, which allow you to access your money while leaving it invested, meaning your funds can continue to grow.
Pension drawdown normally allows you to draw 25% of your pension fund as a tax-free lump-sum, or series of smaller sums. This ‘tax-free cash’ is known as the Pension Commencement Lump Sum, or PCLS. The rest of the fund remains invested and is used to provide you with a taxable income, via withdrawals on a regular basis or as and when you need.
You set the income you want, though this might be adjusted periodically depending on the performance of your investments. You need to manage your investments carefully because, unlike a lifetime annuity, your income isn’t guaranteed for life.
You do not have to draw your pensions commencement lump sum at the outset. Instead you may use your pension fund to take cash as and when you need it and leave the rest untouched where it can continue to grow tax-free.
For each withdrawal, 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.
It may suit you better to use a combination of the options outlined above. You might want to use some of your savings to buy an annuity to cover the essentials (rent, mortgage or household bills), with the rest placed in an income drawdown scheme that allows you to decide how much you wish, and can afford, to withdraw and when.
Alternatively, you might want more flexibility in the early years of retirement, and more security in the later years. If that is the case, this may be a good reason to delay buying an annuity until later.
Find out more about your options for taking an income in retirement and what you need to consider. If you’re unsure about the best approach for you, please get in touch with us for further information.
Pension Freedoms – Looking for a wider choice of investment options?
Saving for your retirement is one of the longest and biggest financial commitments you will ever make. 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 pension freedoms introduced in 2015 provide even more of an incentive to look again at your retirement savings.
If appropriate to your particular situation, one option to consider is a Self-Invested Personal Pension (SIPP), especially if you’re looking for a wider choice of investment options. It’s an option for people who are more comfortable with investment risk and who have more time to regularly review their pension investments to make sure they continue to meet their needs.
First introduced in 1989, this structure provides a range and flexibility of investment that makes a SIPP one of the most flexible methods of saving for retirement.
UK residents can invest money into a SIPP up until the age of 75, and start withdrawing money from as early as 55 (57 from 6 April 2028). Tax relief is available on personal contributions up to £3,600 or 100% of relevant UK earnings (whichever is greater), with tax-efficiency also subject to the pension annual allowance, which is £40,000 for most people and applies to contributions from all sources, including employer. Any unused allowance from previous years may mean more than £40,000 can be contributed tax-efficiently.
Parents can also open a Junior SIPP for their children. It may seem a little premature to start putting money into a SIPP for your child or grandchild at birth, but the tax relief that is available on the contributions makes this a particularly attractive way to save for your child’s future. The money is tied up until they reach retirement age, so this money will not be accessed any time soon.
As with all Defined Contribution pension schemes, the amount that you will have available when you retire depends on the contributions that you (and any employers) have made and how your investments perform over time.
If you’ve got several pensions, it could make sense to bring everything together in one place. Even if the amounts are small, it all adds up. You can transfer most types of pensions to a SIPP and combine them, letting you manage your pension pot in one place. But SIPPs are not suitable for every investor and other types of pensions may be more appropriate. Once in a SIPP wrapper, your savings will grow free from UK Income Tax and Capital Gains Tax.
Investing your retirement savings in a SIPP may not be for everyone. If you are not sure which type of pension scheme is best for you, it’s essential you obtain professional financial advice to review your options. To find out more about pension freedoms and to discuss your options – please contact us.