Take up to 25% of your pension savings tax free and use the rest to buy a secure income, also called an annuity, which will be taxable. This will guarantee to pay you a regular amount of money for the rest of your life or for a guaranteed fixed term. How much income you can expect to receive will depend on the amount of money you’ve saved, current annuity rates, your age and health when you retire and any extra features you choose to add. Extra features like an attached dependant’s pension or increasing payments each year to keep up with inflation, will reduce the starting level of your retirement income.
You can leave your savings invested and access your money as flexibly as you wish. When you retire, take up to 25% of your pension savings as tax free cash. This payment does not need to be taken in one large sum but can be spread over any number of smaller payments while keeping the rest of your savings invested. The tax free cash can be used for one off purchases or as tax efficient income payments. With your remaining savings, you can set up regular or one-off income payments which you can stop and start at anytime. Your pension maybe invested for the rest of your life with the aim for the potential of investment growth. However, it is important to make sure that your pension is invested appropriately to reflect your own attitude to risk and to establish sustainable withdrawal rates so that it doesn’t run out.
While you are still working, under pension freedom rules you can access your pension from age 55 (Age 57 from 2028). You can take some or all of your 25% tax free cash sum, continue to work and continue to contribute to your flexible access pension plan while still receiving tax relief on your contributions. The remaining pension savings can then stay invested with the aim for the potential of investment growth. At any age, you can start to take out flexible income or ad hoc payments, some of which will have further 25% tax free elements from your more recent pension contributions. This can be useful if you wish to move slowly into retirement, maybe working part-time and adding to your income before your state pension starts.
You do not have to restrict yourself to using only one of the above options. For instance, it may be sensible to purchase an annuity with some of your pension saving to make sure all your essential fixed costs such as household bills and food are covered for life in retirement, whilst keeping the rest invested in a flexible access pension plan for non-essential spending such as holidays, evenings out and for the unexpected things in life. As previously mentioned, it is important to make sure that your pension is invested appropriately.
You have the option to withdraw all your savings in your pension plans at once. This can be a reasonable option if the pension values are small. However, this option does have serious drawbacks, as clearly you won’t be able to take an income from your pension if you’ve withdrawn all the money. You may also receive a significant tax bill as, while the first 25% is tax free, the rest will be taxed at your highest marginal rate of income tax.
You can also withdraw your whole pension as a series of lump sums. This is formally known as taking Uncrystallised Funds Pension Lump Sums (UFPLS). Each individual payment will consist of 25% of the amount tax free and the rest taxable as income. You would need to think about any tax implications and how long you need the money to last.
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