Retirement Income- Making the most of your Pension Savings -
After many years of work, the time finally comes when you can start to take it a little easier.
This may be stopping work entirely, or perhaps slowing down a little and it’s the time when the money that has been saved for your pension needs to be put to work.
Reflecting the way that society has changed, the options available to you and your pension funds are also markedly different. The most popular choices now are:
* To take a tax-free lump sum and then use the remainder being used to provide a taxable guaranteed income for life, by means of an Annuity. This income can be set up in different ways, depending on your needs. Options include annual increases to keep pace with rises in the cost of living, spouse’s pensions in case you die before they do and guaranteed minimum payouts. Some annuities will offer the chance of increases each year linked to the performance of investments and others will offer increased rates to those who may have shorter than average life expectancy based on their health, medical history, smoker status or (even) postcode.
* To take a tax-free lump sum and then invest the remainder in a portfolio matched to your appetite for risk and reward. This is known as a Drawdown arrangement and these remaining funds can then be left for as long as is wanted and taken in full or in part, either regularly as a monthly income, or as and when required. All such withdrawals are subject to Income Tax. There is the hope that by continuing to invest the money it will grow and provide the potential for a higher income when required. Of course, the flipside for this is that there is no guarantee that the money will actually last your lifetime.
* To take all of the money in one lump sum at the outset. For those who perhaps have access to sufficient other pension income, this option allows the entire pension fund to be accessed. The first 25% of the money would be tax-free with the rest being subject to Income Tax. Thus, if you have had modest earnings and then cash in a pension, there is the potential for you to go over the higher-rate tax threshold and lose perhaps 40% of the remaining pension in tax.
Other options are also available including taking only some of the pension plan at a time (phasing), having a guaranteed for a set period rather than for life and then reviewing it, as well as what are termed ‘hybrid’ or ‘third-way’ arrangements.
As part of selecting the right way to take the money, you may also need to be aware of the different ways that any benefits are taxed upon your death.
More information can be found in my Free Guides section.
If this is an area you’d like my expert help with, then please get in touch.