SJP What are my pension options
You now have more choice than ever when it comes to how you draw on your retirement assets. The main thing to keep in mind as well, is that there is no ‘one size fits all’ solution. What works for someone else may not be the right thing for you.
There is a lot to consider when you decide to access the assets, pensions, investments and savings that you have accumulated for your retirement. This will include what income you might need, along with maintaining your retirement capital and understanding any taxation implications.
But more than that, choosing how to utilise your retirement assets needs to correspond with your life goals and objectives that you may have through the next stage of your life.
The following sections provide some broad information on the options available for accessing your retirement benefits from pensions, mostly based on use of a Defined Contribution (DC) pension. There is also some information on Defined Benefit schemes which often operate using different rules.
And remember, you now have the flexibility to do any combination of these options to suit your own retirement plans. So take your time, and your St. James’s Place Partner can advise you on the best options to help you achieve your retirement goals.
Use of retirement assets and sources of income
Your retirement money, whether it’s income or lump sums, can come from various sources over the course of your retirement.
Although for many people a pension will be the main source of retirement income, if you have accumulated different investments and savings, then it’s worth thinking of this as a portfolio of retirement assets that you can switch on and off to match your retirement plans.
Over the course of retirement, you may find that you use different assets or sources of income at different times to suit your needs at that time, particularly as you gradually shift from working to being fully retired.
There are various ways to create, or draw an income in retirement, and it’s important to understand what is right for you, and the tax implications of any decision you make.
For example, many people will take their state pension as soon as it becomes available. However if you don’t need it at that time, you are able to defer it. For every nine weeks of deferral, your State Pension income would increase by one percent, which is equivalent to around 5.8% extra income over 52 weeks.
Using your retirement assets and sources of income in ‘the right’ order’ is subjective, and personal to your circumstances and personal goals. Your St. James’s Place Partner can help to ensure you achieve the most tax efficient way to create your income.
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief is generally dependent on individual circumstances.
Options for using your pension money
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Drawdown
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Drawdown
Drawdown is a way of taking money directly from your pension, usually to provide an income in retirement. Typically this would be from a defined contribution pension, such as a personal or workplace pension.
You can choose to move all, or some, of your pension into ‘Drawdown’, once you have reached age 55 (57 from 2028). Once you have done this, those pension monies become ‘crystallised’, which means those benefits have been accessed.
You can then use the money you withdraw however you wish. 25% of the money drawn down will be a tax free lump sum, with the rest subject to your marginal rate of income tax.
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Partial withdrawals (UFPLS)
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Partial withdrawals (UFPLS)
You can withdraw lump sums directly from your un-accessed defined contribution pension. This is known as Uncrystallised Fund Pension Lump Sum (UFPLS), and works differently to drawdown.
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Total withdrawal of your pension funds
Total withdrawal of your pension funds
This is where you are able to withdraw all of your Defined Contribution pension in one go.
You will be able to receive 25% of the value tax free, however the remainder is treated as income for tax purposes.
HMRC could apply emergency tax, which might mean that you initially receive a significantly smaller amount than you expect. You would have to reclaim the tax back from HMRC.
Depending on the amount of the pension you withdraw, because HMRC treat this as ‘earned income’, it may also push you into a higher tax bracket, and you could end up paying more tax than you need to.
It is always best to speak to your St. James’s Place Partner before taking this action.
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Annuity
Annuity
An annuity is a product that you can purchase with the remainder of some, or all of your pension funds, having already taken your 25% tax free cash.
An annuity provides an income that is guaranteed to be paid for the rest of your life.
You are able to build in various options, such as inflation proofing for example. You can also add death benefits, so that the income can continue to a loved one in the event of your death.
You can also potentially increase the rate of income that is paid to you, depending on your health status. These are sometimes known as enhanced, or impaired life annuities, and take into account different criteria, ranging from your height and weight and perhaps blood pressure, all the way up to serious medical conditions. The annuity provider will underwrite your annuity to provide an uplifted rate of income that is specific to your circumstances.
Annuities have declined in popularity in the last few years as they are often viewed as inflexible, and rates have generally fallen in recent years.
However they should not be written off. They can provide a guaranteed income, which can be invaluable, and could form a useful component of your total income, especially as you get older, or if your capacity and tolerance of risk diminishes.
As annuity rates can change substantially and rapidly, there is no guarantee that when you do purchase an annuity the rates will be favourable. This could mean that your pension thereafter may be less than you hoped for.
Drawdown
Drawdown is a way of taking money directly from your pension, usually to provide an income in retirement. Typically this would be from a defined contribution pension, such as a personal or workplace pension.
You can choose to move all, or some, of your pension into ‘Drawdown’, once you have reached age 55 (57 from 2028). Once you have done this, those pension monies become ‘crystallised’, which means those benefits have been accessed.
You can then use the money you withdraw however you wish. 25% of the money drawn down will be a tax free lump sum, with the rest subject to your marginal rate of income tax.
Partial withdrawals (UFPLS)
You can withdraw lump sums directly from your un-accessed defined contribution pension. This is known as Uncrystallised Fund Pension Lump Sum (UFPLS), and works differently to drawdown.
Total withdrawal of your pension funds
This is where you are able to withdraw all of your Defined Contribution pension in one go.
You will be able to receive 25% of the value tax free, however the remainder is treated as income for tax purposes.
HMRC could apply emergency tax, which might mean that you initially receive a significantly smaller amount than you expect. You would have to reclaim the tax back from HMRC.
Depending on the amount of the pension you withdraw, because HMRC treat this as ‘earned income’, it may also push you into a higher tax bracket, and you could end up paying more tax than you need to.
It is always best to speak to your St. James’s Place Partner before taking this action.
Annuity
An annuity is a product that you can purchase with the remainder of some, or all of your pension funds, having already taken your 25% tax free cash.
An annuity provides an income that is guaranteed to be paid for the rest of your life.
You are able to build in various options, such as inflation proofing for example. You can also add death benefits, so that the income can continue to a loved one in the event of your death.
You can also potentially increase the rate of income that is paid to you, depending on your health status. These are sometimes known as enhanced, or impaired life annuities, and take into account different criteria, ranging from your height and weight and perhaps blood pressure, all the way up to serious medical conditions. The annuity provider will underwrite your annuity to provide an uplifted rate of income that is specific to your circumstances.
Annuities have declined in popularity in the last few years as they are often viewed as inflexible, and rates have generally fallen in recent years.
However they should not be written off. They can provide a guaranteed income, which can be invaluable, and could form a useful component of your total income, especially as you get older, or if your capacity and tolerance of risk diminishes.
As annuity rates can change substantially and rapidly, there is no guarantee that when you do purchase an annuity the rates will be favourable. This could mean that your pension thereafter may be less than you hoped for.
`Income drawdown' will reduce the size of your pension fund and the investment growth may not be sufficient to maintain the level of income you wish to draw. If you withdraw money at a rate greater than the growth achieved by your investments, your remaining fund will reduce in value. The level of income you take will need to be reviewed if the fund becomes too small - this is more likely the higher the level of income you take.
The rules governing how much income you can take directly from your pension fund may change. This could mean that the income you can take from the investment no longer meets your requirements.
If you are not sure which option is the right one for you, then it’s worth remembering that you don’t have to make all of your decisions in one go, and that there is no ‘one size fits all’ solution. What works for someone else, may not work for you.
Which is why you may want to think about a combination of retirement options, perhaps at the same time, or at different stages in your retirement as your circumstances change.
Also, think of reaching retirement as just the beginning rather than a deadline. There is nothing wrong with doing nothing while you take your time to take advice and decide on the best course of action.
Combination of solutions
As your financial needs in retirement are likely to change over time, there is nothing to stop you having a combination of solutions and products, perhaps over a period of time, to offer the flexibility you need.
Also, you don’t have to make all of your decisions in one go; for example, you might choose to access your pension flexibly while you are still working and deciding what your future plans are. Possibly when you get into older age, your tolerance and capacity for risk might change, and so you may consider de-risking and guaranteeing some of your income.
There are so many different combinations, and your St. James’s Place Partner will be able to help you put in place what’s right for you.
Do nothing for now
One option that is often overlooked, is to do nothing.
If you are not ready to retire yet, or you haven’t decided a purpose for using your tax free cash lump sum for example, then you can leave your pensions as they are.
Your pension investments will continue to be subject to market volatility, and there are no guarantees, but you may be able to grow your pension funds further. This means when you are ready, your tax free cash lump sum, and pensions could be worth more.
Reaching the age at which you can access your pension benefits doesn’t always mean it is a deadline, but rather a beginning of choices that lay ahead. Your St. James’s Place Partner can help you to plan ahead and think about the right choices for you.
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief is generally dependent on individual circumstances.
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