Taking your pension – what are your options?

Compass and Sand Timer

Pensions

MoneyPlus Features Team

29th January 2016 at 2:41pm

To quote Sir Francis Drake “sometimes it’s the journey that teaches you a lot about your destination”, so it’s well worth mapping out your retirement journey early.

When choosing a retirement path you’ll find the market place provides you with increasing access to a range of simple guides and online tools to help direct you through this exciting new era. And with nobody wanting you to feel like you’re navigating the London tube map, simplicity appears to be the watchword.

Sometimes it’s the journey that teaches you a lot about your destination. Sir Francis Drake

Standard Life has a dedicated section of its website to help you find out more information about your choices. You’ll get the basics with our guides, compare ideas through the retirement pathfinder and explore your options with the retirement calculator.

Chart a course

A good place to start planning any retirement journey is by understanding what routes you could take, and under the new pension freedoms introduced back in April 2015, you have more choice than ever.

When it comes to accessing your pension you can now:

  • Leave it where it is
  • Take the lot
  • Purchase a guaranteed income for life (an annuity)
  • Or take a flexible income

Let’s take a closer look at what these options mean.

 Leave it for now

You don’t have to take money out of your pension straight away, you could benefit from leaving your pension invested.

By opting to leave it for now:

  • You’ll be able to top-up your pension pot by continuing to pay in contributions.
  • You’ll get tax relief on any payment you make and if you’re 55 or over you’ll be able to access your money any time.
  • You’ll stay invested, giving your pot the opportunity to grow and benefit from potential future, tax-efficient growth.
  • You can pass on your remaining pot to anyone you choose, free of inheritance tax. If you die before age 75, this will be completely tax free and if you die after age 75, they’ll be able to access the pension flexibly, at any age, subject to income tax.

Who might this appeal to?

This option might be appealing if you’re planning to carry on working or have other sources of income.

Things to consider

You won’t be able to enjoy your retirement income straight away and you do run the risk of investments performing poorly and your pot falling in value.

A good place to start planning any retirement journey is by understanding what routes you could take, and under the new pension freedoms introduced back in April 2015, you have more choice than ever

Cashing in

If you’re 55 or over you’ve the option to take your whole pension pot as cash in one go if you wish. The first 25% (quarter) will be tax-free and the rest will be taxed at your highest tax rate – by adding it to the rest of your income.

For example, if your pension pot is £60,000. You take £15,000 tax-free. Your pension provider takes tax off the remaining £45,000.

It’s a topic we covered recently in our article ‘Taking a lump sum as cash’, it’s worth taking a look if you want more detailed information.

Who might this appeal to?

If you need a sum of money to pay off a debt such as your mortgage or even fund some new lifestyle choice, then taking your pension in one fell swoop might  accommodate this.

Things to consider

There are many risks associated with cashing in your whole pot. For example, it’s highly likely that you’ll be landed with a large tax bill, it won’t pay you or any dependant a regular income and, without very careful planning, you could run out of money and have nothing to live on in retirement. Be sure to get financial advice before cashing in your whole pot.

Buy an annuity

You can also use your pension savings to buy a fixed income from a provider of your choice and get money every year for as long as you live.

You can build in options too:

  • If you have health or certain lifestyle issues you could qualify for a higher income.
  • You can choose a fixed income that moves in line with inflation and ensure that your money stays consistent with the rising prices of goods, giving you a better chance of a comfortable retirement.
  • You could choose an annuity that allows you to provide for your partner should they outlive you.
  • You could choose an annuity that has a guarantee period. This means the annuity will be paid till the end of the guarantee period, even if you die before then.
  • Depending on your choice of fixed income, a lump sum payout could be paid when you die.

Who might this appeal to?

If you want the peace of mind that you won’t run out of money when you retire this could be a good choice for you.

Things to consider

It’s important to shop around to get the best deal as once you set up your annuity you won’t be able to change providers, cash it in or add different options so you have to get the decision right first time.

Inflation can reduce the effective value of a fixed income due to rising prices of everyday items and bills.

And taking cash or income from your pension can affect your entitlement to means-tested state benefits.

Get flexible

You’ve also the choice of taking a flexible income often called drawdown.

Opting to get flexible with your pension pot means you can adapt your income to meet life’s changes

You’ll be able to do any or a combination of the following:

  • Change the income you take anytime you want.
  • Take an ad-hoc cash withdrawal anytime you like.
  • Keep your pension pot invested, giving it that potential to keep on growing.
  • Leave a pot for your family to use after your death
  • Buy a fixed income (annuity) for life, anytime, with some or your entire pension.

Who might this appeal to?

This could prove a tempting option if you want the flexibility to take money out as and when you like but don’t need a regular income. You’ll also need to be comfortable taking some investment risk with any remaining pot.

Opting to get flexible with your pension pot means you can adapt your income to meet life’s changes, it’s not guaranteed but neither is life.

Things to consider

It will mean you’ll need to be a bit more hands on with your pensions and manage your money and investments more, as you’ll want them to last. And remember that with any investment, future growth is never guaranteed.

By taking cash out of your pension your pot reduces with each withdrawal and the earlier you start taking money out of your pot, the greater the risk your money could run out. What’s left in your pension pot might not grow enough to give you the income you need to last you into old age – and statistics show we are living longer.

Once you take money out of your pension pot any growth in its value is taxable, whereas it will grow tax-free inside the pot – once you take it out you can’t put it back.

And taking cash lump sums could reduce your entitlement to benefits now or as you grow older.

Check the rules

You’ll also need to do a spot of fact finding first as pension providers have different rules when it comes to accessing cash from your pension, so it’s important to find out what your provider offers.

Some providers ban partial withdrawals and others force retirement aged savers to open drawdown plans before they can access their money. So if you want the option to take cash as and when you need it, it’s a good idea to contact your provider now to find out if you can.

If you’re a Standard Life customer, we offer one off withdrawals as well as partial withdrawals and subsequent withdrawals – and you can do it all online too.

But whatever you decide to do it’s important that you shop around to find a provider that can offer you what you’re looking for.

Plan ahead

If you’re a Standard Life customer, we offer one off withdrawals as well as partial withdrawals and subsequent withdrawals – and you can do it all online too

Retirement decisions are amongst some of the most important you’ll make in your lifetime, so you want to get them right. Early planning can play a big role in tailoring the retirement that suits you.

Join the conversation and follow us on twitter @StandardLifeUK and Facebook.

The information in this blog or any response to comments should not be regarded as financial advice. A personal pension is an investment and its value can go up or down and may be worth less than you paid in. Laws and tax rules may change in the future. The information here is based on our understanding in January 2016. Your personal circumstances also have an impact on tax treatment.