Mixing Your Pension Options:
Download: Mixing Your Pension Options
Download: Mixing Your Pension Options
Many people look to mix pension options because it allows them to align the flexibility and security that is right for them. It means they can benefit from a range of options to suit their circumstances, while also having peace of mind that they can access what they need when they need. So, here’s a look at what mixing pension options entails and what you might need to consider!
Benefits of Mixing Pension Options:
There are three key reasons why mixing pension options is so appealing:
It opens up many possibilities
It allows you to strike a balance
It offers either greater flexibility or security
But, as with all financial matters, it’s important to find out how each option works before you make any decisions.
So, what are the options?
Pension rules in recent year have allowed greater flexibility and freedom in what you can do. So, we have listed the most common options below. With a ‘money purchase’ pension, you can mix and match any of these, using different parts of one pension pot or using separate or combined pots. It’s worth pointing out here though that not all pension schemes and providers will offer every option. So, you will need to do your research carefully before making any decisions!
Leave your pension pot untouched.
You might be able to defer taking your pension until a later date. This means that your pot can continue to grow tax-free, potentially providing more income once you come to access it.
Use your pot to buy an annuity.
You can normally take 25% of your pot as a one-off tax-free lump sum and then convert the rest into an annuity (taxable income for the rest of your life).
Use your pot to provide a pension drawdown.
You can usually take up to 25% of your pension pot, or of the amount you allocate for drawdown, as a tax-free one-off sum. The rest can then be reinvested into funds that will give you a regular or irregular taxable income. You can determine the income you want, though you might need to adjust this routinely in line with the performance of your investments.
Take small cash sums from your pot.
You can take cash from your pension pot as and when you need it, leaving the rest untouched. As such, the remainder at any one time can continue to grow tax-free. For each cash withdrawal, normally only the first 25% is tax-free. The rest then qualifies as taxable income. With this option, you will need to check whether there are any charges each time you make a cash withdrawal. Depending on your provider, the amount of withdrawals you can make each year may also be limited. So, make sure you know the terms when considering this option.
Take your whole pot as cash.
Nothing is stopping you closing your pension pot. That’s right – you could choose to take the whole amount as a cash lump sum if you wish. Normally, the first 25% will be tax-free. The rest will then be taxed at your highest tax rate – by adding it to the rest of your income.
Note: Cashing in your whole pot is risky!
For example, the tax bill from doing so is likely to be substantial, and it won’t pay you or any dependent an income. Furthermore, without meticulous planning, it could mean you run out of money and have nothing to live on in retirement.
So, be sure to get financial advice before cashing in your whole pot.
What you need to think about
When considering mixing your pension options, it’s important to think carefully about the implications for your life and what you want to achieve. You should think about your essential income needs, attitude to risk, your circumstances and any tax implications that might sway your decision.
It can be very difficult to know that you have every angle covered – and that’s why we always recommend seeking professional advice. A good financial adviser will be adept at retirement and pension planning – and they will be able to give you peace of mind that your money is on track to meet all of your life’s goals and objectives.
As financial advisers, we take the time to walk clients step-by-step through a series of considerations they will need to make. And to give you some idea, we have listed below a basic list of the main points that you should cover when thinking about mixing your pension options.
Firstly, you will need to familiarise yourself with each option and weigh up whether or not it is right for you. There are an array of different providers to choose from, each offering different ways to use your money in retirement. To confuse the situation even further, they’ll also have varying fees to navigate, charges to understand, and differing ways to manage funds.
Much of what you will and won’t be able to do with your pension will depend on how much money is in it, and on your lifestyle. The amount you need now and when you retire may vary. It could be that you need less than expected. Then again, you could need more to cover unexpected costs when you’re older. You will need to consider what you ‘might’ need as well as what you ‘know’ you will need when considering mixing your pension options.
You’ll need to understand your pension policy – and crucially, all of its terms and features. You will want to establish whether any benefits and guarantees are impacted by particular options, or if you take money from your pension earlier or later than first planned. You will also need to think about your state pension as that could supplement your personal pension.
Investments are a long-term game. So, if you decide to keep money invested, you need to remember that value can go down as well as up! You’ll also need to keep paying any related fees and charges. So, make sure you’re happy with how your funds are invested and make sure they remain in line with both your risk appetite and needs.
Your tax allowances
You’ll need to think carefully about the tax implications associated with the various pension options available to you. Tax treatment is based on your individual circumstances and may be subject to change in the future. It’s a complicated and changeable area – so if you’re at all unsure about anything, it’s a good idea to get expert financial advice to avoid any nasty surprises.
Written by Chris Page
Chris is an experienced financial service professional who joined the business in 2013, as a result of his hard work and dedication he was made a director of the firm late 2014.