Retirement – making 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.

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.

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, 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.

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.

Take your whole pot as cash
Cashing in your pension pot will not give you a secure retirement 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.

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 on:

  • 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 dependents
  • Whether your circumstances are likely to change in the future
Comments are closed.