When coming to retirement there can be an overwhelming amount of information about the choices you are faced with. Here we aim to simplify things and give you the basics.
When can I take benefits from my pension?
Most pension schemes allow you to take your money from the age of 55. This can be used to provide an income in retirement or, if you are still working may assist in supplementing your salary enabling you to work fewer hours. In some circumstances you may even be able to take your benefits earlier than 55 due to poor health or by being in a profession where retirement begins at a younger age.
What are my options when taking income in retirement?
The options available to you when taking your income in retirement may differ depending on your pension scheme or provider. However, under the new pension freedom rules you can mix any of the options listed below using different pensions or even different parts of the same pension.
- Leave your pension untouched – Letting your pot accumulate and grow tax-free will potentially provide you with greater income when you choose to access it.
- Taking a flexible income in retirement via Flexi-Access Drawdown (FAD) – You can take 25% of your pension pot as a tax free lump sum and re-invest the remaining funds to provide you with a regular taxable income in retirement. You decide the income you wish to receive and have the flexibility to start and stop this as you like.
The main difference between this option and a lifetime annuity is that although flexi-access drawdown gives you greater flexibility, the income isn’t guaranteed for life and investment performance plays a significant part in what income you can receive. However, by carefully managing the investments within your pension with the assistance of a Raymond James Wealth Manager, this can be simple and easy to manage giving you control and flexibility over your income in retirement.
- Purchase a guaranteed annuity – One option is to take 25% of your pot as a one off tax-free lump sum and use the remainder to purchase a taxable income for life – called an annuity. There are a variety of different annuity options available which can affect the level of income you receive in retirement. In addition, you also have the option to provide an income for life for a dependant or beneficiary such as a partner should you die.
- Small cash withdrawals–Uncrystalised Fund Pension Lump Sum (UFPLS) – It is possible to withdraw cash as and when you require and leave the rest untouched (uncrystalised) and invested where it can continue to grow tax free. Each withdrawal is treated separately with the first 25% being tax-free and the remainder being regarded as taxable income. However, one thing to bear in mind is that there are tax implications which would need to be considered.
- Withdraw the entire pot – One option would be to take your entire pot as cash in one lump sum. The first 25% would be tax free and the remainder would be taxed at your highest tax rate. Therefore there are considerable tax implications when considering this option as the payment will be added on to your current income. Further still, there are significant risks associated with this option such as a large tax bill, no income will be paid to you or a dependant in the event of death, and you may run out of cash to fund your retirement.
Mixing your options – It is possible to mix the options available to you when taking income from your pension by taking income in different amounts at different times depending on what suits your specific needs. You can even continue to save into your pension and receive the associated tax relief up to age 55.
If you’re over 50 and considering taking all or part of your pension you can give us a call. Our Wealth Managers offer an initial consultation which will help you to fully understand your options. We will be able to recommend which option may be best suited to you based on your needs and goals.