Since 2015, people approaching retirement have had more control over what they do with their pension savings, which has opened a whole new world of choice known as ‘pension freedoms’.
The biggest change allowed savers with private pension plans (defined contribution) to take their entire pension fund as cash from age 55.
So, what are these pension choices?
We’ll look at an example of a pension fund of £100,000.
Tax free lump sum – you can take 25% as a tax free lump sum (in this case £25,000)
Withdraw additional lump sums – if you have taken the 25% tax free lump sum, you can still take the remaining 75% (in this case £75,000) in full as a taxable lump sum or in separate smaller sums. Each lump sum withdrawal will be added to your other income for that year and taxed at the relevant rates.
Annuity – this is a product that provides a guaranteed secure income for life and can be purchased on a single or joint life basis (to protect your spouse) using all or some of your pension fund. An enhanced annuity (higher income) is also available to investors with certain health issues.
Flexible income drawdown – this was once considered a route for investors with larger pension funds but has now become an option for people with a more modest fund. It provides the opportunity to leave your pension fund invested and withdraw (‘drawdown’) money at your discretion. This can be before or after you’ve taken your tax free lump sum and also provides more control over the tax you pay, particularly if you drawdown in different years. This is often seen as a more tax efficient savings option.
Of course, ultimately, it’s up to you what you do with your fund, but with this added flexibility more consideration than ever is required to make sure your pension savings provide you with the standard of living you desire – and deserve – in retirement!
To discuss your choices in more detail, please call us for a free, no obligation chat.
This is an opinion based article and does not constitute financial advice. Davidsons is authorised and regulated by the Financial Conduct Authority.