Major changes to pension rules mean that savers now have greater power over their money when it comes to retiring. Rather than be forced to buy an annuity which provides a regular income over time, people aged over 55 can now choose to cash in their entire pension pot and spend it however they like.
Some may choose to blow all their savings on holidays and fast cars, but the vast majority of people who have been saving for their future throughout their working life are unlikely to see this as a sensible thing to do. Either way, for those who want to access their money there are several options now available.
How do I get my money?
Although you can still buy an annuity as before, some of the other options now available may be more suitable to your personal circumstances.
One option is known as uncrystallised funds pension lump sum or, thankfully, UFPLS for short. It may sound confusing but it is intended to work in a similar way to a bank account where you can dip in and make as many withdrawals as you like. Unlike a bank account however, you are hit with a tax payment with every withdrawal (more of that later) and is generally more suitable for those who want to make small and regular withdrawals over time and continue to pay less that £10,000 into their pension each year.
Another option is known as ‘flex-access drawdown’ where you take a tax-free lump sum of 25 per cent from your pension and leave the rest invested. You can then use that as a regular income which will be taxed at your normal tax rate.
The new rules only apply to defined contribution pension schemes and not final salary pensions that guarantee and income after retirement. If you have the latter it may be possible to transfer to a defined contribution scheme to access your savings.
Did you say tax?
Although these ‘Pension Freedoms’ bring unprecedented flexibility to your pension savings, there are important tax implications to remember. The first 25 per cent of withdrawals is tax-free, but the rest will be taxed as income and combined with earnings from elsewhere. Too many withdrawals could unintentionally bump you into a higher tax band so beware
What if I need help deciding?
With more choice comes more risk and let’s be honest, pensions can be confusing. All the new options have their own pros and cons and will not suit everybody. Deciding what to do with your savings could be one of the most important financial decisions you will ever make so it makes sense to speak to an expert.
An independent financial advisor can talk you through what the best options are so you get the best possible income in your retirement. The government has also set up a scheme called Pension Wise, which offers free and impartial guidance.
There is no rush to make a decision so whatever you choose do with your money, make sure it is right for you.