What can I do with my pension pot?
10th July 2020 | Retirement
Pension freedoms introduced in 2015 have changed the rules for cashing in your pension. Retirees now have a range of options for their pension pot.
The way you access your pension has changed and retirees now have a host of options to choose from. New pension freedoms introduced on 6 April 2015 mean you now have much greater flexibility in how you access your pension savings.
This guide will outline the options available to you to give you an idea of the choices you can make. However, bear in mind that pensions are complicated, so it is always wise to seek professional advice before making decisions that can affect your future.
Here are some of the options available to retirees.
Leave your pension pot and take the money later
It is up to you when you start taking money from your pension pot. You can delay taking your pension and allow your pot to grow tax-free. This means there may be more money in your pot when you do choose to take it, and this may offer additional security in your retirement. However, as with every investment, the value of your pot could go up or down.
It is a good idea to check with your pension provider or a financial advisor as there may be charges if you choose not to take the money when you reach your selected retirement agreed in your plan.
Receive a guaranteed income (annuity)
You can also choose to use your pension pot to buy an insurance policy which will provide a guaranteed income for the rest of your life. This option is called an annuity.
If you choose to take this option, you will normally take up to 25% of your pension pot as a tax-free lump sum and then invest the remaining 75% into the annuity.
There are various types of annuity such as single life, joint life and investment-linked so it is worth taking advice to find the most suitable solution for your circumstances.
Take cash in lump sums
You can take cash in lump sums from your pension pot. You can take as much or as little as you need whenever you choose and leave the rest untouched. Usually, for each cash withdrawal, the first 25% is tax-free. The rest will count as taxable income. Depending on your plan, there may be charges for each withdrawal or limits to how many times you can make a withdrawal each year.
Take your whole pension pot at once
While it is possible to take your whole pension pot in one go, it is usually not advisable. Firstly, there will be tax implications if you withdraw all your money from your pension pot. You will have to pay tax on 75% of the total amount. So, it is usually more tax-efficient to use one of the other options. In addition, cashing in your pension pot will mean you do not have a secure income in retirement.
If you are considering this option, you should get advice, so you fully understand the implications of cashing in your whole pension pot.
Mix your options
You do not have to choose one of the above options. It is possible to mix and match options over time and over your total pension pot. You can also continue to save into your pension and get tax relief until you are aged 75. Your financial adviser will be able to guide you to the most suitable options for your specific circumstances.
Avoid scams
When making decisions about your pension always talk to your pension provider or a regulated financial adviser. There are many pension scams out there and these could result in you losing your money, facing a tax bill of up to 55% and paying extra fees.
The new pension freedoms offer much more choice over how you plan your retirement. It is important to understand all the options so you make the most appropriate decisions about your future finances.
References
https://www.pensionwise.gov.uk/en/pension-pot-options
PENSIONS ARE NOT NORMALLY ACCESSIBLE UNTIL AGE 55. YOUR PENSION INCOME COULD ALSO BE AFFECTED BY INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS. THE TAX IMPLICATIONS OF PENSION WITHDRAWALS WILL BE BASED ON YOUR INDIVIDUAL CIRCUMSTANCES, TAX LEGISLATION AND REGULATION, WHICH ARE SUBJECT TO CHANGE IN THE FUTURE.
