Sarah Austin, Independent Financial Adviser from Martin-Redman Partners, answers a great question she was asked recently - “What happens when I reach 65? Do I get a set income forever or just a certain amount until the money runs out?”.
Will my pension give me a set income forever when I retire?
There were changes introduced in April 2015, allowing you more choice and flexibility over how and when you can take money from your pension pot.
Whether you plan to retire fully, to cut back your hours gradually or to carry on working for longer, you can now tailor when and how you use your pension, and when you stop saving into it – to fit with your particular retirement plans. You have to be at least 55 (normally) to take any income or cash lump sums from your pension.
So, to answer to the question; here are the options available:
Buy a guaranteed income for life – an annuity
You can normally withdraw up to a quarter (25%) of your pot as a one-off tax-free lump sum then convert the rest into a taxable income for life called an annuity. There are different lifetime annuity options and features to choose from that affect how much income you would get.
This option means you will receive a guaranteed income for life, until you die.
Take a flexible retirement income – pension drawdown
With this option you can normally take up to 25% (a quarter) of your pension pot as a tax-free lump sum, then re-invest the rest into a portfolio of funds to provide you with a regular taxable income. With this option your pension remains invested, so can grow (or fall) depending on investment returns.
You can choose and can vary the income you would like, so there is more flexibility than an annuity and can help with tax planning. Unlike an annuity, your income isn’t guaranteed for life – so you need to manage your investments carefully to ensure your pension pot does not run out in your lifetime.
Take cash sums from your pot
You can use your existing pension pot to take cash as and when you need it, leaving the rest invested with the potential to grow tax-free.
For each cash withdrawal, normally the first 25% (quarter) is tax-free and the rest counts as taxable income, which can mean that you pay more tax on the cash withdrawal than you were expecting to, if you have not taken advice. Like pension drawdown, you need to ensure you are not taking too many withdrawals, too quickly, risking your pension pot running out in your lifetime.
Mixing your options
You can mix two or more of the above to suit your circumstances. Which option or combination is right for you will depend on:
· your age and health
· when you stop or reduce your work
· whether you have financial dependents
· your income objectives and attitude to risk
· the size of your pension pot and other savings
· whether your circumstances are likely to change in the future
· any pension or other savings your spouse or partner has
How do I make a decision on the best route from me?
Before choosing which option to take; you will need to consider what income you’ll have from other sources (such as the State Pension), how much income you’ll need to support your lifestyle and how long your money needs to last. You’ll also need to consider risks to your income, tax and inheritance, which it is sensible to take independent financial advice on.
There are benefits and drawbacks with each route and there is a lot to weigh up when working out which option, or combination, is right for you and your circumstances.
An Independent Financial Adviser (such as us our specialists at Martin-Redman Partners) will be able to recommend which option (or combination) is best for you and help find you the most competitive products.
Arrange a meeting to discuss your pension and retirement arrangements
Please get in touch with us to arrange an introductory meeting, at our cost. At Martin-Redman Partners we have both male and female advisers who can help you make the most of your money – either by managing your pensions and investments and assisting with your financial plan.
To find out more about how we can help, or if you have any questions on any point in this article please get in touch by calling us on 01223 792196 or emailing firstname.lastname@example.org. We look forward to hearing from you.
About Martin-Redman Partners
We are a team of experienced Independent Financial Advisers (IFAs) who can advise on your personal or business financial arrangements. We have been building trusted relationships with clients for many years by articulating clear and tailored recommendations in areas ranging from investments to pensions and retirement planning, to complex estate planning advice.
We offer expert independent financial advice throughout Cambridgeshire, Leicestershire, Suffolk, East Anglia and the South East. Many of our clients are within, or are in the surrounding areas of Cambridge, Grantham, Stamford, Bury St Edmunds, Frinton on Sea, Ely, Peterborough, Huntingdon, Cambourne, Newmarket, Soham and Oundle.
The information contained is for guidance only and does not constitute financial advice. It is based on our understanding of UK legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly, no responsibility can be assumed by Martin-Redman Partners its officers or employees, for any loss in connection with the content hereof and any such action or inaction.
We provide independent financial advice on investments, pensions, inheritance tax planning and protection. We work with private individuals, businesses and professional introducers, such as accountants and solicitors, to ensure our clients financial advice needs are met.