Retirement is a chance to do more of what you enjoy, whether that’s travelling, spending more time with family or taking up exciting new hobbies. You might decide to continue working for a while, possibly part time, or your priority may be to help the next generation, perhaps by contributing to education costs or providing help to get onto the property ladder.
Whatever plans you have for your retirement, the introduction of pension freedoms in April 2015, means that you now have more options than ever over how to access your pension pot. Whilst the range of options and increased flexibility has never been better, it’s become even more important to make the right decision and choose the best option for you. Make the wrong decisions and you could be spending your retirement struggling to make ends meet. You can usually take your pension from age 55 (57 from 2028), although the longer you leave your money invested and continue to pay into it, the higher your income could be when you do eventually choose to take it. Typically, up to 25% of your pension can be paid to you completely tax free, after which withdrawals are subject to income tax. The tax-free amount can be taken as a single lump sum or as smaller regular sums, where 25% per cent of each withdrawal is tax-free. You no longer have to use your pension fund to buy an annuity, although many people still do, as an annuity guarantees a regular income stream for life. The amount of income you receive will depend upon a number of factors including the value of your pension, your health and the options you choose. Once set up, an annuity usually can’t be changed or cancelled, so it’s important to shop around and choose your annuity options carefully. Alternatively, you could consider income drawdown which is one of the most flexible ways to access your pension. With this option, your fund remains invested and you’re in control of how much income you take and when to take it. Many people are attracted to drawdown as the flexibility allows them to draw an income without committing to an annuity. In addition, in the event of death, any remaining fund can be passed on to your loved ones, often tax free. 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. You should also take care when drawing more than your tax-free cash amount, as this will then trigger the money purchase annual allowance. This effectively reduces the amount that can be paid into your pension with the benefit of tax relief from £40,000 to just £4,000 per year and could therefore have serious implications for your retirement plans. Unlike an annuity, income drawdown doesn’t guarantee an income for life, so this option carries more risk that your money might run out before you do. It is also important to note that as your pension fund remains invested, you will need to give thought to an appropriate investment strategy and the level of risk that you are comfortable taking. The value of your pension funds (and any income from them) can go down as well as up. Past performance is not a reliable indicator of future performance. There’s clearly a lot to weigh up when considering your ideal retirement and how best to draw your pension. If you don’t feel confident with all these complex decisions, then please don’t hesitate to contact us. We can help you decide which option or combination of options will be most suitable for you and your retirement journey. Comments are closed.
|