Pension Freedom

Before the Pension Freedom legislation was introduced, you were restricted to taking your pension savings as regular payments after the tax-free 25% cash withdrawal. This usually meant purchasing an annuity, but for some who met the right criteria, they had the option to take a drawdown.

Since April 2015 bought about Pension Freedom, you can now choose how you access your personal pensions. We explore these options below, so you can better understand how you can draw from your pension pot

WHAT FREEDOMS CAN I NOW ENJOY?

Currently, you can access your defined contribution pension at age 55, and this is set to change to 57 from 2028. This could be earlier if you retire early on ill-health grounds.

When you are able to access your retirement income, you can withdraw 25% as a tax-free lump sum withdrawal, then you can access the rest via the below options.

OPTION 1 – LEAVE YOUR MONEY WHERE IT IS (AND TAKE A PENSION DRAWDOWN)

You can leave your pension savings where they are, so they stay invested (typically, in the stock market) and hopefully, continue to increase in value. You can choose to take a regular income or just take lump sums when you choose. You can read our article about Pension Drawdown by clicking here to learn more.

OPTION 2 – PURCHASE AN ANNUITY

An annuity is a product you purchase with your retirement savings, and in return you are paid income for life. It will pay a regular, fixed guaranteed income to last the rest of your life, and you can alter the policy to include features such as yearly increases or passing on your income when you die.

The prices of this option can vary depending on the provider and which features you choose. Once you set it up it cannot be altered, so consider carefully.

OPTION 3 – WITHDRAW THE WHOLE LOT

This option is subject to income tax implications.

The 75% that’s left (after the 25% tax relief) is subject to income tax. If you take your pension in the same year as you’ve received salary, and/or if you have a large pot, you will likely be pushed into a higher tax bracket, thereby increasing your marginal rate of tax, and having to pay a higher tax rate.

Due to the significant tax implication that could arise, it is a good idea to seek professional advice before you proceed with this option.

OPTION 4 – MIX OF THE ABOVE

You can mix and match the above options.

WHAT IF I HAVE A FINAL SALARY PENSION?

If you have a final salary pension (aka defined benefit scheme or career average pension scheme), or a funded public final salary scheme, you can transfer it into a defined contribution pension to take advantage of these Pension Freedoms.

You should, however, seek professional advice first to see if this is the right choice for you. You could lose valuable benefits if you transfer from a final salary pension. If your final salary balance is worth more than £30,000 you must seek advice if you wish to move.

WHAT TO BE CAREFUL OF

The introduction of the Pension Freedom rules has created many benefits, but there are two areas in particular you need to be careful when it comes to your pension.

1. Don’t spend too much too soon, but don’t sit on it either! It’s obvious you shouldn’t spend too much too soon to avoid running out of money, but consider the flip side too: sometimes people may fear running out of money, and so live a more prudent life than necessary.

If you work with a TCFP Financial Adviser we can show you forecasting and recommend how much you should spend so you get the balance right.

1. Beware of scammers! There are a lot of people cold calling and trying to get people to do illegal and/or unsuitable things – such as releasing their cash before 55 or cash-in final salary pensions when it’s not in the person’s best interest.

Be careful about taking advice from someone you haven’t sought out yourself, and be particularly careful about someone calling you out of the blue – this applies in almost every situation, not just pension-related!