01.12.2021

YOUR OPTIONS FOR ACCESSING YOUR PENSION EXPLAINED

YOUR OPTIONS FOR ACCESSING YOUR PENSION EXPLAINED

Retirement savers now have an opportunity to plan their futures with a flexibility unknown to previous generations.

Today, there is no longer a hard stop after which you are expected to rely on a preset income stream regardless of changing circumstances. Instead, you are more in control than ever before and can tailor a plan to suit you as you move into retirement.

However, with the increase in choices available, deciding which options are best for you can sometimes be overwhelming. In this article, we will take you through the main considerations when assessing your retirement benefits and discuss how to work out what you will need. We generally focus on those with Defined Contribution (DC) pensions, although some consideration is given to those with Defined Benefit (DB) pensions.

At all stages, it’s important to remember that you have the flexibility to combine any of the following options to best suit your needs. Talk to me to plan the best outcome for you and your family.

What are the options for accessing my pension?
  1. Drawdown: This option is available for those aged 55 or above (57 from 2028) and allows you to take money direct from your pension with no limit on withdrawals, subject to the value of your pension pot. You can use a drawdown to create income – or take it as a lump sum or a series of lump sums. The first 25% you take is tax free; after that, it’s liable to Income Tax at your marginal rate.
  2. Partial or total withdrawal: You can make a partial withdrawal from your unaccessed DC pension without moving into pension drawdown through an Uncrystallised Funds Pension Lump Sum (UFPLS). The 25% tax-free rule applies, although HMRC could apply an emergency tax to a large withdrawal, which you will have to claim back. You can also withdraw your entire pension fund via this method. Always discuss your plans with your St. James's Place Partner before making this decision.
  3. Annuity: This is a product you can purchase with your pension funds that will provide a guaranteed income for the rest of your life. Although the popularity of annuities has declined in recent years, they should not be dismissed as an option – especially as part of a diversified approach to retirement planning. Rates tend to be better the older you are, and it’s always worth looking for an enhanced annuity to improve your rate further. Again, speak to your St. James's Place Partner.
Working out what you need

It’s important to remember that your retirement income is not entirely dependent on your pension. While that is likely to be the most important source, other investments and savings can act as a portfolio of assets that you utilise to achieve your retirement plans.

This ability to switch different sources of income on and off is particularly useful if you’re planning to gradually shift from working to being fully retired, as opposed to stopping work for good on a set date.

When working out how much you need for the rest of your life, a good starting point is to understand that there is no magic number. The figure will be different for everyone, and the only way to arrive at something that works for you is to sit with your adviser, decide what your objectives are for later life and see when certain incomes are going to switch on and off. Mapping out your retirement plans should take the following into account:

  • When do your earnings stop and what are your regular outgoings?
  • When does State Pension kick in?
  • Have you got any DB benefits? If you have a scheme in place, it will often be set up to pay out at a certain age. You can usually choose to take it all as income, some as tax-free cash or ask for a transfer-value figure, but remember advice is crucial when looking at DB pensions.
  • Can your DC pot can remain invested? Has your view on investment risk changed? Do you want to take some tax-free cash?
  • What are your other savings and investments, such as ISAs?
Passing on your pension pot when you die

Your loved ones can receive your DC pension pot when you die and, as your DC pension typically sits outside your estate, it is not taken into consideration when calculating Inheritance Tax. Income Tax is payable at the marginal rate of the beneficiary, depending on the age of death and whether you have started to access the pension.

Weighing up your options with an adviser

It can be overwhelming with so much choice on offer, but don’t think you have to make all the decisions on day one. You now have the freedom and choice to plan the second half of your life according to your goals and the specific circumstances you face.

I can help take the emotion out of any decisions you make and put a plan in place that is bespoke to you.

The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

`Income drawdown' will reduce the size of your pension fund and the investment growth may not be sufficient to maintain the level of income you wish to draw. If you withdraw money at a rate greater than the growth achieved by your investments, your remaining fund will reduce in value. The level of income you take will need to be reviewed if the fund becomes too small - this is more likely the higher the level of income you take.

The income you receive may be lower than the amount you could receive from an annuity, depending on the performance of your investments.

As annuity rates can change substantially and rapidly, there is no guarantee that when you do purchase an annuity the rates will be favourable. This could mean that your pension thereafter may be less than you hoped for.

The rules governing how much income you can take directly from your pension fund may change. This could mean that the income you can take from the investment no longer meets your requirements

  • Retirement Planning
  • Pensions
  • Financial Adviser
  • Financial Advice
  • Retirement & Pension Planning

As a Chartered Financial Planner and Fellow of the CII, I have satisfied rigorous criteria relating to professional qualifications and ethical good practice.

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