There has never been a better time to be thinking about your pension. The freedoms announced in the 2014 Budget have afforded savers more flexibility than ever, so it’s important to understand the options available to you to ensure your savings work as hard for you as you have for them.
Despite all the changes, pensions still represent one of the most tax-efficient ways for most people to save for retirement.
What is a Pension?
At its most basic, a pension is simply a savings scheme that offers very attractive tax benefits until at least 55. The money in your plan is invested and benefits from tax efficient growth.
The Basic State Pension
An Occupational Pension
Personal pensions are schemes organised by the individual for the benefit of the individual. It does not matter who you work for, how long you work for them or how much you earn – you decide how much to contribute (subject to an annual contribution limit) and you decide where the money is invested. The more you put in, the more money you have to invest for your future – and the better your underlying investments perform, the higher that value will be.
There are three basic types of personal pension:
Individual Personal Pensions
Self-Invested Personal Pensions
What you do with your pension pot is up to you but the significance of your decisions should not be underestimated. That’s why we suggest you seek advice from a suitably qualified financial adviser.
Once you reach the minimum pension age, normally 55, you’ll be able to
- leave your pension fund invested;
- enter drawdown, thereby taking some of your money whilst leaving the rest where it is;
- withdraw cash in one or a number of lump sums;
- purchase an annuity;
- go with a combination of all of the above;
- or take your entire pension pot in one go.
When taking an income from your pension in any way, the first 25% will normally be tax free with the remainder being taxed as income. Pension taxation can be complicated, so we recommend that you seek professional advice for clarification of how it affects you and your particular set of circumstances.
Leave your pension fund invested
There is no need to rush into a decision even though the changes to regulation have made it easier to access your pension. By leaving your fund where it is, you’ll give your savings a chance to grow largely free of tax.
From April 2015, some restrictions on accessing pension funds were lifted. Flexi-access drawdown allows you to take any amount to provide an income that suits your requirements, at monthly, quarterly, half-yearly or annual intervals that can be varied on your instruction. Whilst in drawdown, your pension funds remain invested and can continue to grow largely tax free.
Clients already in capped drawdown can choose to convert to flexi-access at any point or remain in capped drawdown.
Take an uncrystallised funds pension lump sum
In addition to drawdown, you can take lump sum payments from your pension called Uncrystallised Funds Pension Lump Sums. As the name suggests, this allows you to take any number of lump sums (assuming you have sufficient funds built up) without crystallising the rest of your funds. You can even choose to take your whole pot in one go. It’s worth noting though that any growth of your pot once it’s left the pension environment will be subject to additional tax.
Purchase an annuity
By passing your pension pot to an annuity provider, you’ll be able to guarantee a set income for the rest of your life. Annuities are generally fixed so you won’t be able to vary what you receive to suit your circumstances once you’ve made the agreement.
A combination of the above options
You could opt for a combination of the above should it suit your risk appetite, tax, growth and income requirements.
Points for consideration
We strongly recommend that you seek advice from a suitably qualified financial adviser before making any decisions about your pension.
Should you choose to take an income through drawdown or an uncrystallised funds pension lump sum, you need to bear in mind the sustainability of your chosen income method. Changes in circumstances, taxation, the performance of your underlying investments and the length of time that you live in retirement will all have an effect on the income available from your pension.