Your Pension – When you are ready to retire

What should you do with your pension when you are ready to retire? You may not need to do anything, but let’s explore the options…

Firstly, you need to know what you want for this new stage in your life.

By that, we mean do you want to truly retire and not work at all? If so, you will need more income than you would if you decided to carry on working part time.

And then you need to think about your health. Are you fit, healthy and active? You are probably going to want to tick some of those things off your bucket list while you still have the energy to do so. You’ll need money to do that.

Do you want to support your family with independent education, university or buying their first home? Are you in your forever home, or would you like to move or downsize?

All of this needs to be considered as it will have an effect on what income you need, and how you access it.

So, once you have pulled all of that together there are two main options – an annuity or a flexible drawdown.

With an annuity you will have a guaranteed income which makes it easier for budgeting. However, you need to bear in mind that you will have no access to your money if you needed to get hold of a large sum, and that interest rates can be lower.

If you pass away your spouse can only access the money in an annuity if you have set up a spouse’s pension, and that is typically 50% of the pension income annuity.

A flexible drawdown means that the pension pot remains where it is, and you take out what you need each month. Most people opt for a regular sum for budgeting but can then easily access additional funds as needed. The rest of the pot is still invested, although you can change your investment profile as your requirements alter.

Flexible drawdowns are also well set up for protecting your spouse and family. You can choose named beneficiaries who can access the remainder of your pension when you die, so it does not die with you.

There is an option to take a lump sum from your pension – you can take out up to 25% tax free. Many people choose to do that at the start of their retirement to enable them to tick off some of the bucket list. If you take your full tax free allowance the remaining income you draw that year from your pension will be taxable. Pension providers will tax the money at source – paying you the net amount.

As an alternative to an annuity or flexi access drawdown, you can continue to take lump sums out of the pension each year – you can take 25% tax free, and the remainder would be taxed.

However, that is not something we often recommend to clients. Unless you are very disciplined with money it can be easy to spend too much, and then discover your pension pot has dwindled away and you are forced to make some hard decisions.

There are also tax implications for regularly withdrawing lump sums – you may have to pay tax at a higher rate. There is also the chance that you will owe tax at the end of the tax year, so you will need to have money available to cover that.

This approach means you need to be very disciplined about putting aside money for your tax liabilities.

If you are nearing retirement age and would like some support with next steps, please contact us on 01344 875 310.

pension ready to retire