Just over a year ago, in April 2015, pension choices increased – and increased dramatically. The then Chancellor, George Osborne, changed the rules to give people greater access to their entire pension, with no requirement to buy an annuity. Broadly, there are now six available options to those who have reached the age of 55 or over:
1. Leaving the pension pot untouched,
2. Purchasing an annuity,
3. Getting an adjustable income
4. Taking cash in chunks
5. Cashing in the whole pot in one go
6. Mixing any of the options.
There were fears that many people would go for the fifth choice, and blow all their pension on a yacht or Lamborghini. There’s no evidence to show this has happened wholesale, but there’s an interesting Telegraph article which shows who’s spent what and what on.
Pension choices – the six options
1. Leaving your pot untouched: this is an option if you don’t need or want to access your pension. Leaving it alone means it will still grow tax-free, potentially providing you with a higher level of income when you do access it.
2. Purchasing an annuity: still a popular option, you can take 25% of your pension pot tax-free and purchase an annuity with the rest, to give you a taxable income for life.
3. Getting an adjustable income: this means you take 25% of the pension pot, and reinvest the remainder of the funds to give you a regular, taxable income.
4. Taking cash chunks: put simply, you take out chunks when you need it and leave the rest untouched to grow tax-free. There may be limits on, or charges related to, the amounts you take out and only 25% of each withdrawal is tax free. With this option your pension pot isn’t re-invested into new funds and it won’t provide for a dependant after you die.
5. Cashing in the whole pot in one go: if you do this, the first 25% will be tax-free and the rest will be taxed at your highest tax rate, by adding it to the rest of your income.
6. Mixing any of the options: you don’t have to choose only one option, but you can mix and match. And you can carry on getting tax relief up to the age of 75.
What is clear from this simple analysis is that, because of the choice, more than ever people need professional advice on what options are best, to meet their aspirations in retirement. Before making any decision you’ll need to know the answer to questions such as: when do I want to stop work? How is my health? How much have I saved so far? What income do I want in retirement?
Please get in touch if you would like objective, bespoke advice on how to save for retirement.
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