You’ve worked hard for what must feel like a lifetime and now you’re faced with trying to understand your options at retirement.
Well, we have good news and bad news for you:
This article will help you to do just that.
What you do with your pension(s) and investments when you retire is a huge decision. It is essential not to understate how important it is to ensure you are making the correct decisions which meet your current and future needs, goals and aspirations.
You may wish to retire now or delay your retirement to continue working. Alternatively, you may wish to retire now but are in a position to delay taking money from your pension pot, choosing instead to leave your money invested until you need it in the future. In this instance, you will be leaning on other income such as savings, other investments or rental income to fund your lifestyle for a defined period of time.
Options truly are hinged to your personal circumstances and a trusted Financial Adviser can help you to make more informed, best-fit decisions.
In the meantime, here are a few key options for you to understand and consider.
In short, an annuity gives you a regular, guaranteed income in retirement. And you can buy one with some or even all of your pension pot. Doing so means you could receive a secure income for life – no matter how long you live - or for an agreed number of years.
Normally you can opt to take up to 25% of your pension pot as tax-free cash (some pensions may allow an enhanced tax-free cash amount). The remainder of your pot can then be used to buy an annuity.
It is important to know early that the income you receive from your annuity is taxed as earnings.
Just as you have a myriad of options at retirement, there are also different types of annuities available to choose from. It’s always wise to shop around and ensure you obtain the best rates. A Financial Adviser can help you to do this and also to understand which of these bests meet your circumstances and needs:
Your health status, any sources of other retirement income and your attitude to risk will all be taken into consideration by a Financial Adviser when deciding which type of annuity (if any) is appropriate for you. It’s also important to note that purchasing an annuity is usually an irreversible decision, meaning once you have purchased an annuity, there is no longer the option to put that money back into a pension.
Often referred to as ‘Pension Drawdown’, Flexible Retirement Income is a means by which you can flexibly take money out of your pension to live on in retirement.
It is designed to give you more flexibility over how, and when, you receive your pension. For example:
With this option, you are in control of how much of your pension pot is drawn down, and when. However, how long your pot lasts depends on the performance of your investments and how much you choose to drawdown from your pot in retirement. The value of your pension pot (and any income from it) can go down, as well as up, which means your future income is not guaranteed. Working with a Financial Adviser can mean you are equipped with the best possible advice when deciding how to invest your remaining pot.
Some pension providers offer you the option of taking smaller amounts of money from your pension pot until it’s empty. Instead of your 25% tax-free amount being taken as one lump sum (for example, taking £25k from a £100k pension pot), 25% of each lump sum withdrawal is tax-free. The remainder is added to any other income and is taxable at your marginal rate. So it’s worth bearing in mind that if your income is not monitored or taken without any planning, this could incur a significant tax bill and even place you into a higher bracket.
One thing to consider here is that, as the remainder of your pot stays invested, the total value of your pension pot and the value of future withdrawals are not guaranteed, since investments can go down as well as up.
One advantage of this particular option is that it allows you to spread pension withdrawals over a number of years, reducing the overall amount of tax you pay and utilising your annual allowances as much as possible.
However, some providers will charge you each time you make a lump sum withdrawal and may even place limits on the number of withdrawals you can make each year.
Pension Triviality rules allow for 100% of your pension fund to be released as a cash lump sum payment from smaller value pots, often referred to as a ‘small pots’ payment. Pension Triviality rules will apply, one of which being that a small pots payment is usually limited to £10,000 and a maximum of three plans (£30,000) can be taken as a small pot payment over your lifetime.
Simply put, you can cash in your entire pot with 25% being tax free and the remaining 75% being treated as taxable income.
You may opt to empty your entire pension pot in one go for a number of reasons, for example to clear debts, to buy a property or because you have other income streams which will meet your future expenses in retirement.
One obvious potential drawback of this option is that, depending on the size of your pension pot, you may be met with a sizeable tax bill. It is rarely advisable to consider taking your entire pot in one lump sum.
Also, consider whether this sum can last you throughout retirement: do you have other sources of income, for example from savings or investments such as property rentals, which will supplement your income (and that of any dependents) over a long period of time?
Good news! There is nothing to stop you from mixing between these different options.
You have lots of flexibility and choice when it comes to how, and when, you take your money from your pension pot. This means you may be in a position to adapt to suit changing needs at different times throughout your retirement.
It can however be a daunting experience sifting through these options. After all, what you decide now can impact your retirement income over the rest of your life.
Your circumstances will dictate which options are right for you and your dependents. It may be that you opt for a Flexible Retirement Income early in retirement and then later take an annuity in order to secure a guaranteed income later in life. You may instead wish to split your pot to allow you to take a guaranteed income now, leaving the remainder of your pot invested.
And what if you have more than one pension pot? Simply put, you can choose different options for each of your pots.
Considerations:
As you can see, there are a number of options to consider when you are planning your retirement and it may be that a mix of two or more of these options will best suit your needs – either now, or in the future, with each having different outcomes and implications on your longer-term goals.
Working with a Financial Adviser who explicitly understands your current circumstances, your future financial roadmap and your dream retirement lifestyle can ultimately take away anxieties around the complex mix of options detailed here in this article.
Speaking to a Financial Adviser can ensure you are given experienced and valuable advice based solely on your personal situation, taking away complexities and giving you a sense of control over the money you worked so hard to save.
Whole of market Independent Financial Advisers can offer a full range of products and services, opposed a tied adviser who may only be able to offer a restrict range, which may not meet your needs.
