Financial Decisions

Flexibility to use your pension pot in the way that suits your needs

Working out how to make adequate financial provision for retirement is one of the most important financial decisions most of us will ever face. However, it can be a daunting topic, and the options may seem overwhelming. Over the past year, there has been a seismic change to the retirement landscape with the introduction of the Government’s ‘pension freedoms’.

These reforms – announced in the 2014 Budget and extended in 2015 this year – give you the flexibility to use your pension pot in the way that suits your needs, with the aim of creating better financial outcomes for you and your family.

As long as you are over the age of 55, you have unlimited access to any Defined Contribution (DC) pension pot to save, spend or invest as you see fit.

For many people, retirement now represents an opportunity to realise life-long ambitions, pursue new passions or help family members with their income needs.

Understanding the options

There is no easy answer or ‘one-size-fits-all’ solution, so it is important to understand the options. You do not have to choose just one option, and you may find that a ‘mix and match’ approach is the most appropriate for your situation.

Leave your pension pot untouched

You may be able to delay taking your pension until a later date. Your pot then continues to grow tax-free, potentially providing more income once you access it.

Use your pot to buy a guaranteed income for life – an Annuity

You can choose to take up to a quarter (25%) of your pot as a one-off tax-free lump sum, and 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 receive. You can also choose to provide an income for life for a dependant or other beneficiary after you die.

Use your pot to provide a flexible retirement income -–Flexi-Access Drawdown

With this option, you take up to 25% (a quarter) 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, though this may be adjusted periodically depending on the performance of your investments. Unlike with a lifetime annuity, your income isn’t guaranteed for life – so your investments need to be managed carefully.

Take small cash sums from your pot

You can use your existing pension pot to take cash as and when you need it and leave the rest untouched where it can continue to grow tax-free. 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.

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.

Take your whole pot as cash

Cashing in your pension pot will not give you a secure retirement income.

You could close your pension pot and take the entire amount as cash in one go if you wish. The first 25% (quarter) will be tax-free, and the rest will be taxed at your highest tax rate –by adding it to the rest of your income.

There are many risks associated with cashing in your entire pot. For example, it’s highly likely that you’ll be subject to a significant tax bill, it won’t pay you or any dependant a regular income and, without very careful planning, you could run out of money and have nothing to live on in retirement, other than the State Pension and any savings you may have.

Mixing your options

You don’t have to choose one option when deciding how to access your pension; – you can mix and match as you like, and take cash and income at different times to suit your needs. If you wish, you can also keep saving into a pension and get tax relief up to age 75.

Which option or combination is right for you will depend upon:

  • When you stop or reduce your work
  • Your income objectives and attitude to risk
  • Your age and health
  • The size of your pension pot and other savings
  • Any pension or other savings your spouse or partner has, if relevant
  • Whether you have financial dependants
  • Whether your circumstances are likely to change in the future

Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change.

A pension is a long-term investment. The fund value may fluctuate and can go down. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.