In fact, taking a step back, what do you mean by ‘retirement’?
For many people retirement will mean no longer going to work five days a week. Others may wish to cut back their hours gradually, or to carry on working for longer. The good news is that you can now tailor when and how you use your pension – and when you stop saving into it – to fit with your individual retirement journey.
What are my retirement options?
There are many options available as to what you can do with your pension pot when you reach retirement, and deciding what is best for you can be difficult.
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: once a very popular option, you take 25% of your pension pot tax-free and purchase an annuity with the rest, to give you a secure, regular, taxable income for life. There is no risk with this option, but once you set it up you cannot change it and the income you end up with may be smaller than other options. This option is no longer so popular as the rates are now very low (typically 2-3%).
3. Drawdown: this means you take 25% of the pension pot, and reinvest the remainder of the funds to give you a regular, taxable income. This is a more flexible option than taking an annuity as you can choose how much you would like to withdraw each year. However, there is a risk you may run out of money if you withdraw too much, or your investments do not perform well.
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 reinvested into new funds and it won’t provide for a dependent 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 your options: you don’t have to choose only one option, you can mix and match. This is often the best choice, as a combined retirement strategy will be suited to your individual needs.
If you are exploring options and would like some expert, bespoke advice – the team here at Hartsfield can help. Please get in touch.
PENSIONS AND TAX PLANNING GUIDE
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INVESTING FOR RETIREMENT INCOME GUIDE
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