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Pensions: Planning Ahead for Your Retirement
Once you reach retirement age, you will no longer receive income from your job, and will have to rely on a pension to pay for your daily living. The more you understand how these work, the better you can start planning ahead, but the amount of information available can sometimes make it feel overwhelming. We can help you decide which is the best type of pension for you.What is a pension pot?
Your ‘pot’ is the total amount of pension contributions that you have collected over the years towards retirement. It is usually made up of money you have contributed and payments from your employer, plus the growth that you will hopefully have gained from its investments. You may have a single pension or various different funds and workplace pensions. The pot excludes your State Pension from the Government.When can I withdraw money from my pension pot?
Most personal pension schemes set an age at which you can start taking money out. The minimum is almost always age 55. You can find out the limit from your pension provider if you’re not sure. You will be able to withdraw up to 25% of the total pot as a tax-free lump sum. Before you start taking money out, think about how long it might need to last. It’s important to plan ahead and make sure you can live comfortably for 20-30 years on the money you have saved.How can I use my pension pot?
You can choose how to withdraw your money, with the main options being:- taking all or some of it as cash
- buying a product that pays you a guaranteed income for life – this is sometimes called an annuity
- investing it to get a regular, adjustable income – sometimes called ‘flexi-access drawdown’
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Cash withdrawals and lump sums
You can take your whole pension as a cash lump sum – in one go if you wish – or you can treat your pot like a bank account and make several withdrawals over months or years.
Not all pension providers allow cash withdrawals, however, so you will need to check this as part of your planning. If you can withdraw cash, sometimes fees and charges apply, so it can help to reduce the number of times you take money out.
Tax is also something to consider. ‘Remember, you can take 25% of your overall pension pot tax free, but the remaining 75% will be subject to your marginal rate of tax.’
Annuities / guaranteed income for life
An annuity turns your pension pot into an annual pension. You can choose whether you want a guaranteed income for life, or for a specified period.
You can buy your annuity from any provider you choose – there’s no need to stick with the same company that runs your pension. It’s well worth seeking detailed quotes from a few providers to find the most suitable deal.
A few important considerations for annuities include:
- The level of flexibility you need. Are you able to increase your income in future if the cost of living goes up?
- Once you’ve purchased an annuity and set your income, you can’t change your mind or switch to another plan or provider.
- Some providers set a minimum investment amount.
- Annuity rates can change in line with the economy or the stock market.
Income drawdown schemes
A drawdown scheme involves you transferring some or all of your pension pot for investment on the stock market. You take income from your investments, with no limits on how much you withdraw.
Key considerations for drawdown include:
- Fees can be expensive.
- Your income isn’t a guaranteed amount.
- Because there is no limit on how much you can withdraw annually, you could potentially run out of money.
- Your investment can decrease or increase based on stock market conditions.
Will taking money from my pension pot affect my benefits?
Some benefits are ‘means-tested’ which means that if you have over a certain amount of money, you are not eligible for that benefit.
The way that you take funds from your pension pot can affect these benefits, so again you should plan carefully so that you don’t lose out.
Means-tested benefits include Pension Credit, Housing Benefit, Council Tax Support, Income Support, Income-based Jobseeker’s Allowance and Income-related Employment and Support Allowance.*
*Source: DWP. Correct as of May 2024.
How can CT Wealth Management help me?
We are professional pensions advisers, and it’s our job to help you make sure you have planned your pension carefully to maximise your income in retirement.
We will spend time exploring your situation, looking at any pension pots you already have in place and deciding how best to manage your money now and in the future. We will ensure we allow for tax, benefits and any other key considerations.
We are authorised representatives of the Openwork Partnership who are fully authorised and regulated by the Financial Conduct Authority. For an initial consultation get in touch today.
The value of investments and any income from them can fall as well as rise. You may not get back the amount originally invested.
HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.
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