It is two years since the pension freedoms launch in April 2015 and over £9.2 billion has been released according to figures published by HMRC.
Drawing money from your pension pot is a seemingly attractive option, giving the freedom to withdraw either some or all of your fund as a cash lump sum, however, you see fit. Although, it is important that you consider the tax implications of this option. Typically 25% of any withdrawal will be tax-free but the remaining 75% will be taxed as income, potentially generating a large tax bill for you to pay. Historically, a pension annuity has been the most popular option used by those approaching retirement.
Although other options are available; it remains popular because a pension annuity is still the only way to turn your pension savings into a regular, guaranteed income for life. Whether or not you are considering a pension drawdown or pension annuity, when handling your retirement funds, it is important to seek advice.
The Financial Conduct Authority (FCA) recently said 30% of consumers go into a pension drawdown without seeking professional recommendations. Often people are sticking with their current provider instead of exploring their options and shopping around.
Pension Drawdown is considered a flexible way to access your pension savings and manage your tax bill. It allows you to be in control of your fund as there are no limits to the amount that you can withdraw from your savings or when you can take it.
However, drawdown can have its downsides. As pension savings remain invested, there is the potential for them to reduce in value as well as an increase because there is no guarantee of investment performance meeting future income needs.
This means your pension income could run out during your lifetime if you’re not careful.
With an annuity, you can convert your pension savings into a regular guaranteed income which will be paid to you for the rest of your life.
Many people choose this option due to the peace of mind that comes from knowing that their pension income will not run out before they pass away. Once you have purchased an annuity you cannot typically change your mind or cancel once the cancellation period is over, which is why it is vital to shop around to get the best deal.
Deciding on the right pension-income option for you might seem confusing and that’s why talking to an experienced specialist or financial adviser is so important.
Your current option and or provider may be the best option, but as with most things, shopping around and seeking advice is the best way to find out.
If at any stage you’re at all unsure about which option is right for you, we have a Pension Expert that can help.
Speak to Pension Paul @ Edward Mellor today & look at booking a free pension consultation today. Call 0161 443 4555, or complete the contact form below and a member of our team will be in touch shortly.