your own money at retirement could be
APPROACHING
Your choices
at retirement
At retirement age, you can take 25 per cent of your pension tax-free, but then
you need to decide what you want to do with the balance.
Annuities
The majority of people have typically opted for
an annuity, whereby you swap your pot with a
provider, which agrees to pay you a fixed
income for the rest of your life. However, while
annuities offer security of income, they have
often been labelled bad value – and in most
cases the income dies with you.
If you are buying an annuity, ensure
you shop around for the best deal,
as you do not have to take what
your own provider offers.
You can, under the new rules, simply withdraw
cash from your pension. But while the first
quarter is free from the clutches of HMRC, the
remainder will be taxed at your highest tax
rate as it will be added to any additional
income you receive. There can be charges and
you also risk depleting your funds altogether.
Key points
Do you buy an annuity, choose to enter
drawdown, or go for a bit of both?
If you’re comfortable doing so, managing your
own money at retirement could be rewarding
Drawdown is not recommended for everyone,
especially if you have a smaller pension
Drawdown
The other main option is income drawdown.
Here you remain invested in the market and
draw an income from your pot.
The ideal scenario is you can
continue to invest and grow your
pension well past retirement, while
drawing a sufficient income.
There are two types of drawdown, although
the first – capped – is no longer available.
This imposed withdrawal limits – set by the
Government Actuary’s Department (GAD) –
on the amounts you could take out. The
second type, flexi-access drawdown,
introduced with the pensions overhaul in
April 2015, has no such cap – and you can
pass your pot on when you die.
With drawdown, your income is likely to
fluctuate based on your portfolio’s
investment returns. The worst-case scenario
is that you could lose all your money if you
withdraw too much and/or markets take a
bad turn. As such, drawdown is not
recommended for everyone, especially those
with smaller pensions.
But remember you are not tied to one route
or another – you can have the best of both
worlds. You could take a hybrid approach
and use your tax-free cash to purchase an
annuity and then use the rest to go into
drawdown and look at growing your
pension further.
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