The Government made radical changes to tax rules around private pensions in order to give people greater access to their pension savings in 2015. Headlined as giving people ‘freedom and choice in pensions’ it seems like nothing but good news for people approaching pension age. However, it also means that without the right advice, it is easier to make a mistake and leave yourself worse off.
As always you can take a quarter of the pot as a tax-free lump sum. However, for years people have needed to use the remaining money to buy an annuity – a product that pays you an income each year until the end of your life.
The key change that was made was a change in the tax laws, meaning that people aged over 55 can choose to take the whole amount as a lump sum, paying no tax on the first quarter and the rest taxed as if it were a salary at the same rate as income tax.
Essentially there are currently six options for how you can take your defined contribution pension pot:
Leave your whole pension pot untouched
One of your options is to just leave your money alone. Keep it invested in your pot until you actually need it. There is nothing to say that you have to start withdrawing from your pension pot just because you have reached that all-important ‘selected retirement age’.
Purchasing an annuity (guaranteed income)
An interesting option to give you a guaranteed income is to instead use your pot to purchase an insurance policy. This will then guarantee to pay out and give you a regular income for the rest of your life and, importantly, will provide that income regardless of how long you live.
Get an adjustable income (Flexi Access Drawdown)
If you still need a regular income but are comfortable with some variation then a Flexi Access Drawdown could work for you. Your pot is invested and you still get that regular income but you can decide how much to take, when and over what period you want to receive pay outs.
Take cash in chunks (Uncrystallised Funds Pension Lump Sum)
If you want to spread the 25 per cent tax-free amount rather than have it paid in one lump sum at the start, you can take smaller sums from your pot until it runs out.
Cash your whole pot in one go
Of course, it’s your money so there is nothing to stop you from withdrawing the lot in one go to do with what you wish! If you take this option, then 25% is tax free and the remainder is taxable.
Mix any of your options
If you have a reasonably large pot, then the most sensible option may well be to mix several different.
There is free and impartial guidance available to all over the phone or face-to-face, from government-run Pension Wise, to help support people to making decisions which will best suit their needs in retirement. www.pensionsadvisoryservice.org.uk/about-pensions/pension-reform/freedom-and-choice
There is more information about pensions options on the Martin Lewis Money Saving Expert website. www.moneysavingexpert.com/savings/pension-freedom