The new “Pension Freedom” rules have given people more choice with their pension pots. The rules only apply to defined contribution schemes (personal or workplace pensions where you build up your own pension pot). Defined benefit schemes (also known as an employer’s salary-related scheme such as a final salary scheme) are not affected by the new rules.
You need to be 55 or over to access your pension pot
You can now withdraw as much of the money as you want from your pension when you reach 55, although it is taxed as income above the initial 25%.
Your options are
• buy a guaranteed income for life – an annuity
• invest in funds designed to provide you with a flexible retirement income – called drawdown (the income is not guaranteed for life)
• take small cash sums from your pot when you want them
• take all your pot as cash in one go
• combine these options
The lump sum is tax-free on the initial 25% of your pot, so that proportion is worth taking. The remainder can be taken as a lump sum which will be subject to tax, and can be used in any of the following ways:
• pay off a mortgage or other debts, such as credit card bills
• use towards a buy-to-let property, to provide further income in retirement
• invest your cash lump sum, to provide more income in retirement
• other pros include the ability to gift the money to your family, such as helping with university fees, or being able to leave a legacy
Taking all of your pension as a lump sum could deplete or remove your retirement income options. You will not have as much money to spend on an annuity or go into drawdown, which could lower your monthly income significantly in retirement.
Having looked at the pros and cons the reality is anything but straightforward. What you need to do is seek advice from a specialist. Each case is different and each individual is different. There is no common solution. Taking your whole pension at once is a big decision. You may find that you don’t need access to all of your pot immediately or that you can defer your options to a later date. You do need to take into account all of your assets, including ISA’s, savings and investments. An adviser can look at your overall wealth and help you to make the right decision at the right time.