Prior to April 2015, retirement options for those who had a personal pension or self-invested personal pension (SIPP) were fairly limited.
You were able to take a pension commencement lump sum equivalent to 25% of your pension fund, which was tax-free, and the rest had to be used to purchase an annuity that would provide you with a set income for life.
However, since then the rules have changed and there is now a lot more flexibility if you have a pension and have reached age 55.
[* The UK government has confirmed plans to increase the minimum age you can access your pension from 55 – to 57 from 2028. From then on, the minimum pension age will remain ten years below the State Pension age.]
Your options are as follows:
Option 1: Do nothing with your pension (leave it untouched)
If you don’t need the money, you don’t have to draw it straight away – in fact, you can leave it invested for as long as you wish.
Doing so means that your fund continues to be able to grow in a very tax-efficient manner.
Option 2: Buy an annuity
If you want to use your fund to buy an annuity, you can still do so.
The plus of this option is that it locks in a regular and guaranteed income for life.
There are downsides, however.
Firstly, annuity rates are currently very low, meaning that you get a much worse income in return for your pension fund.
Secondly, if you were to die within a few years of buying an annuity then you would lose out, as the amount paid out would be less than you had bought the annuity for.
A compromise would be to use some of your pension fund to buy an annuity and take the rest as and when you need it.
* Currently, I am not aware of any annuity providers for non-UK residents
Option 3: Take a lump sum payment
Upon reaching age 55, you can take up to 25 per cent of your pension as a tax-free cash sum. This is known as a Pension Commencement Lump Sum (PCLS).
The remaining money in your pot can be drawn down as an income or remain invested until you need it (known as flexi-access drawdown)
As noted in Option 1, you should only take your PCLS if/when you actually need it.
The longer you delay it, the more time your pension fund has to grow. As a result, you get 25 per cent tax-free of a bigger pot when you do eventually come to take it.
Option 4: Draw down your pension in bites
Another way to draw down on your pension is to take your money out in bites.
You have the freedom to take out as much of your money as you like and while 25pc of every sum is tax-free, the rest is taxable.
Such withdrawals are known as Uncrystallised Funds Pension Lump Sums.
Option 5: Cash in the whole pot at once
You can decide to draw the whole pot in one go.
Before doing so, you need to consider what you will live on in retirement.
In addition, you will need to fully understand the tax implications of doing so.
In most cases, the tax costs are so onerous that it isn’t practical.
However, if you are resident in certain jurisdictions (e.g. France and Dubai) at the time, then there are some interesting tax and estate planning opportunities around doing this.
Option 6: A mix of the options above
Not all pensions are equal
Finally, it should be noted that not every pension will provide the option of flexible drawdown or allow unlimited withdrawals. This especially applies to pensions set up prior to April 2015.
With that in mind, you should always review the access options that apply to your particular pension scheme and if it does not offer you the flexibility that you need, consider moving it to another pension provider.
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