Ellis Bates Financial Advisers
You have several options with regards accessing 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.
More recently referred to as flexible retirement income, or flexi-access drawdown, pension drawdown is a way of taking money out of your pension pot when you retire.
Whilst receiving your pension income, you are then allowing the remainder of your pension fund to remain invested for potential growth. Instead of using all the money in your pension fund to buy an annuity (formerly the traditional and only option available on your retirement), you can now choose to leave your money invested and take a regular income direct from the fund.
This can be a good option for example, if you plan to carry on working either full or part time or are not ready or need to take all of your pension income. It may also allow you to take a lump sum prior to retirement to meet a certain objective for example redeeming your mortgage.
If you contact your pension(s) provider, they will let you know if you can set up a drawdown arrangement with them and if not, you will need to transfer to another provider who can. It is recommended you shop around providers even if your own provider can set this up for you (or work with a Financial Advisor who will do this for you) as there are different options, costs and benefits to be gained.
Before making the decision to transfer it is vital to check you are not losing any enhanced benefits held under your existing plan.
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.
Please be aware the Government announced an increase in the age you can access your pension from 55 to 57 in 2028.
You can take more but the amounts you withdraw after you take your 25% tax-free lump sum will be classed as taxable earnings in the tax year you take them. Your taxable earnings will include all income sources including your state pension.
Ideally, the money in your pension fund needs to carry on growing at a rate that makes your ongoing withdrawals sustainable throughout your retirement. You will need your fund to be wisely invested to make sure you can maintain your retirement lifestyle.
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.
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You also have the options of phased or partial drawdown and we can explain these further as part of a personalised consultation. We use sophisticated cashflow modelling software to help you develop lifetime financial plans and to bring your pension planning to life, so you can see the financial impact of the pension options you choose.
As Financial Advisors we are here to help you make good decisions about using your pension fund and how it’s accessed and invested.
Learn more about cashflow modelling and how it can bring your financial future to life.
Following the 2023 Spring Budget, Jeremy Hunt has announced that the Lifetime Allowance charge will be removed from April 2023 before it is abolished entirely from April 2024.
Those with large pension pots will also need to consider the pension lifetime allowance implications: the lifetime allowance is currently £1.731m, and the amount you can withdraw from your pension in your lifetime before paying the hefty 55% tax charge on everything you take above this limit.
When you move to drawdown, you crystallise part of your pension pot (known as a benefit crystallisation event) and if you move your whole pension to drawdown at once you crystallise the entire pot and could then be hit with the lifetime allowance charge as soon as you access your pension.
It is vital to take expert professional advice if you think you may exceed your pension lifetime allowance or you are unsure how this is calculated before making any drawdown decisions, as the taxation implications could be very costly.
It is important for you to understand any charges associated from pension drawdown, these may include ongoing charges for managing your investments and the associated charges and taxation of complying with HMRC pension withdrawals. Again, ideally your pension investments should grow enough to cover these extra costs and we are here to help you accurately calculate and understand your pension options.
You have a number of other options for how to access the money in your pension pot and pension drawdown is just one of those options.
It’s important to know the different tax rules for each option.
Choosing the best way to use your pension fund is complicated
The options for using your pension pot are more flexible than ever, but it’s important to understand how your decisions will affect your retirement income in the future.
Our Financial Advisors are here to help you understand your options and to make the best decisions for your hard earned pension pot.
Find out more about the flexible pension options that may be available for you to consider.
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