Flexibility to use your pension pot in a way that suits your needs
Working out how to plan for your retirement can be one of the most important financial decisions you will ever face. The pension freedoms of 2015 may have introduced greater flexibility and choice but with that inevitably comes greater complexity and pressure to choose the right option for your circumstances. It can be a daunting topic and the possibilities may seem overwhelming.
Although retirement may offer an opportunity to realise life-long ambitions, pursue new passions or help family members with their income needs, it’s important that you understand all the options that are open to you. There is no easy answer or ‘one-size-fits-all’ solution. You may find that a ‘mix and match’ approach is the most appropriate for your situation.
As well as being a member of the NHS Pension Scheme, you may also be a member of a Defined Contribution (DC) scheme, such as a Personal Pension or a SIPP. If you are over the age of 55, you will have unlimited access to any DC pension pot to save, spend or invest as you see fit.
Leave your pension pot untouched
One option is to delay taking your pension until a later date. Your ‘pot’ will then continue 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 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% 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. Your income isn’t guaranteed for life as it is with a lifetime annuity, so your investments need to be managed carefully.
Take ad-hoc 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% 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% 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
As mentioned, you don’t have to just 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.
- The option that fits best for you will depend upon various factors such as:
- 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
We have over 40 years’ specialist experience helping medical professionals to assess their financial situation and decide which option or combination of solutions is best for them. If you’d like to know more about how we can help, do contact us.
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.