Working out the best way to use your pension, can seem daunting. Whether you plan to retire fully, reduce your hours gradually or to carry on working for longer, you can now tailor when and how you use your pension – and when you stop saving into it – to fit with your retirement plans.
Currently, the minimum age you can take any workplace or personal pension is age 55. You need to check with your scheme provider or insurance company to make sure the scheme will allow this. This is proposed to increase to age 57 by 2028.
From 2028 onwards, the proposal will be for the minimum pension age to increase in line with the State Pension age. This means there will be a 10-year gap between when you can take your own pensions and any State Pension you are eligible for.
What’s the best way to use your pension?
As you can see there’s a lot to consider when working out the best way to use your pension. Your choices will depend on your circumstances and your plans for the future. Here we’re touching on a few of the options you have for your retirement, to be able to give you a better idea call us on 0113 436 0110 to arrange a no obligation pension review.
There’s a lot to consider when working out which option or combination will provide you and any beneficiaries with a reliable and tax-efficient income throughout your retirement.
Leave your pension pot untouched
Once you reach the age of 55, you have the right to take as much of your pension fund as you like as cash – but that doesn’t mean that you have to. You may be able to delay taking your pension until a later date and may wish to leave your money where it is so that it still has the potential to grow – though your fund could also go down in value, of course. Equally, you might just want some time to consider all your options before deciding whether to take cash from your pension fund – and, if so, how much.
Could you use your pension pot to buy an annuity?
You can choose to take up to a quarter (25%) of your pot as a one-off, tax-free lump sum, then convert the rest into a taxable income for life called an ‘annuity’. There are different lifetime annuity options and features to choose from that affect how much income you would get. You can also choose to provide an income for life for a beneficiary after you die.
Or how about having a flexible income in your retirement?
With this option, you take up to 25% (a quarter) of the pension pot that is being crystallised as a tax-free lump sum, then re-invest the rest into funds designed to provide you with a taxable income. You set the income you want, though this may be adjusted periodically depending on the performance of your investments (funds can be left alone to accrue if there is no immediate need for income). Unlike with a lifetime annuity, your income isn’t guaranteed for life – so you need to manage your investments carefully.
Previously, there were government limits (known as ‘Government Actuary’s Department’ or GAD limits) on how much income you could withdraw each year. This still applies to existing capped drawdown contracts where taxable income was being taken before 5 April 2015, providing the GAD limit is respected. These restrictions have been removed from 6 April 2015 for new flexi-access drawdown contracts.
Taking small amount of cash from your pension pot
If you’re not sure how your income needs will change in the future, you may wish to take money from your defined contribution pension pots as and when you need it and leave the rest untouched. For each cash withdrawal, the first 25% (quarter) is tax free, and the rest counts as taxable income. There may be charges each time you make a cash withdrawal and/or limits on how many withdrawals you can make each year.
Can we help you with your pension?
We hope this article on your pension options has been useful. If you’d like to have a detailed discussion about what you can do with your retirement fund call us on 0113 436 0110 or fill in the contact form.