By Steve Owen, Rees Astley
When the time comes to access your pension, you’ll need to choose which
method you use, with options including: buying an annuity, taking income
through (flexi-access) drawdown, withdrawing lump sums or a combination of all of
them.
When the time comes to access your pension, you’ll need to choose which
method you use, with options including: buying an annuity, taking income
through (flexi-access) drawdown, withdrawing lump sums or a combination of all of
them.
There are advantages and disadvantages to each method and, in some cases, your decision is permanent, so it’s important to ensure that you obtain professional financial advice when considering your different options.
This is a complex calculation that must take into account the growth rate your investments might achieve, the eroding effects of inflation on your savings and how long your savings will need to last.
Annuities – guaranteed income for life
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.
You can normally withdraw up to a quarter of your pot as a one-off tax-free lump sum, then convert the rest into a taxable income for life – an annuity. There are different lifetime annuity options and features to choose from that affect how much income you may receive. You can also choose to provide an income for life for a dependant or other beneficiary after you die.
Flexible retirement income – pension drawdown
Flexibility is the main attraction offered by income drawdown plans, which allow you to access your money while leaving it invested, meaning your funds can continue to grow.
This option normally means you take up to 25% of your pension pot, or of the amount you allocate for 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, 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.
Small cash sum withdrawals – tax-free
This is an important consideration for those weighing up pension options at age 55, the earliest age at which you can take up to 25% of your pension pot tax-free.
For each cash withdrawal, the remaining counts as taxable income and there could 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 dependant after you die.
There are also more tax implications to consider than with the previous two options. Remember, you don’t have to take it all at once – you can take it in several smaller amounts if you prefer.
Combination – mix and match
If appropriate to your particular situation, it may suit you better to combine these methods. 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 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.
The value of retirement planning advice
There will be a number of questions you will need answers to before deciding how to use your pension savings to provide you with an income.
To discuss the options available to you, please to contact me, Steve Owen for independent advice on 01686 626616 or 07966 684211.
This is a complex calculation that must take into account the growth rate your investments might achieve, the eroding effects of inflation on your savings and how long your savings will need to last.
Annuities – guaranteed income for life
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.
You can normally withdraw up to a quarter of your pot as a one-off tax-free lump sum, then convert the rest into a taxable income for life – an annuity. There are different lifetime annuity options and features to choose from that affect how much income you may receive. You can also choose to provide an income for life for a dependant or other beneficiary after you die.
Flexible retirement income – pension drawdown
Flexibility is the main attraction offered by income drawdown plans, which allow you to access your money while leaving it invested, meaning your funds can continue to grow.
This option normally means you take up to 25% of your pension pot, or of the amount you allocate for 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, 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.
Small cash sum withdrawals – tax-free
This is an important consideration for those weighing up pension options at age 55, the earliest age at which you can take up to 25% of your pension pot tax-free.
For each cash withdrawal, the remaining counts as taxable income and there could 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 dependant after you die.
There are also more tax implications to consider than with the previous two options. Remember, you don’t have to take it all at once – you can take it in several smaller amounts if you prefer.
Combination – mix and match
If appropriate to your particular situation, it may suit you better to combine these methods. 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 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.
The value of retirement planning advice
There will be a number of questions you will need answers to before deciding how to use your pension savings to provide you with an income.
To discuss the options available to you, please to contact me, Steve Owen for independent advice on 01686 626616 or 07966 684211.
