Since pension freedoms were introduced in 2015, we have received more enquiries and questions from clients about what rules are now in place and what is the best way for them to take money from their pension.
People across the country now have more flexibility over when they can access their funds (usually 55 years or over), and how to take money from your pension pot.
With this flexibility, we believe it’s essential you get professional advice, to ensure you’re taking your money tax-efficiently and that your funds will last through retirement. Fortunately, we’re experts in pensions, investments and retirement planning, and we’re on-hand to give you guidance, advice and recommendations.
What are the limits to pension income drawdowns?
One of the first questions we get asked by clients first thinking about Pension Drawdown is how much money can I take, when can I take it and what are the limits?
Since Pension Freedoms were introduced in 2015, people now have a lot more flexibility with their pensions. While giving people the flexibility with their money, we believe advice is needed to ensure you don’t run out of money in later life.
Depending on your pension provider and pension type, there could be access restrictions with how you can access your money. Many older pension policies do not offer flexible drawdown, and it’s worth checking your policy to see if you can drawdown flexibly before you consider this option.
Also, many pension providers will not accept transfers of less than £10,000 into a drawdown policy. There are no specific rules regarding a minimum pot value, but due to the fees the providers can charge you for this, it’s not financially viable for them to offer the drawdown facility.
After paying out the fixed management fee and then any transaction charges the provider may charge, these charges could have a considerable impact on your small pension pot.
In these cases, values under £10,000 may need to be transferred out or purchase a pension annuity with the funds.
Regardless of how much is in your retirement pot, you qualify to take out 25% of your funds’ tax-free (the tax-free lump sum), and if you take any of the remainders, this will be taxed at your Income Tax rate.
What are my options in taking money from my pension?
Under the government rules, there are some ways you can take your pension, depending on the type of pension you have and the options your policy allows.
With a defined contribution pension (most personal pensions and auto-enrolment pensions) you can either buy an annuity, take flexible income drawdown or some providers will allow a hybrid of both.
However, not all providers offer these options, and it’s worth checking your policy with a professional adviser.
Set up a Flexi-access drawdown plan
You can withdraw your 25% tax-free lump-sum or a set amount under 25% through Flexi-access drawdown. The rest of your funds will remain invested with your pension provider, so they still have the potential to grow, shrink or remain static depending on market fluctuations. If you wish to reduce the impact of market fluctuations, you may consider moving your funds into a low-risk pension policy. Although your pension funds may not grow as quickly in the low-risk fund, they will also not be as susceptible to drops market performance.
If you take more than your 25% tax-free cash, then the value above the 25% and any future withdrawals will be subject to income tax.
Make ad hoc cash withdrawals
Through drawdown, you could continue to take money from your pension either at regular stages or on an ad-hoc basis. Your pension provider may charge you for each withdrawal you make, so it’s worth bearing in mind the flexibility you want from your pension when setting up your Flexi-drawdown policy.
If you have other funds that do not charge you for withdrawals, it could be worth considering taking money from this source, rather than paying for each transaction from your pension.
Your pension provider may also have a limit on the number of withdrawals per year, so it’s worth checking before setting up the drawdown account. Speaking with an adviser will help you to make the right choices.
Please remember that a Flexi-access drawdown pension may not be like your bank account. You may not be able take money as and when you need it. The process could take a few days or even weeks, depending on the fund type and the amount you wish to withdraw.
Purchase a pension annuity
Purchasing an annuity was the primary choice for accessing your pension a few years ago. And whilst current rates are pretty low, some people like the security they provide with a regular income. There are a few options available when purchasing an annuity. As an annuity is an irreversible decision, it’s advisable to seek professional advice on which type of annuity (enhanced, life, income tracker etc.) is right for you.
Some providers, depending on the value of your pension fund, will allow you to purchase an annuity with part of your funds and leave the rest in drawdown.
Withdraw your whole pension pot
We would never usually recommend that you take your whole pension pot in one go. The current full state pension is £165.34 a week*, and without your pension topping up your income, retirement could be challenging.
If you do wish to take the full amount, again, the first 25% will be tax-free, and the remainder will be added to any other income and taxed under the tax bracket you now fall into.
As we said, cashing in your whole pension pot can be very risky and can typically only be done over the age of 55 years old. We would strongly recommend speaking with a professional adviser before making any decisions about taking money from your pension.
Are there different rules to drawdown once you hit 75 years old?
Depending on what pension plan you have and how you’ve accessed your pension so far, there could be different rules when you reach 75.
If you have a defined contribution pension, and you haven’t taken any funds yet, some older pension plans may stipulate that you need to purchase an annuity or withdraw the full amount in one go. Even some pension drawdown plans have a rule that by the age of 75, you need to purchase an annuity.
Some pension drawdown providers also stipulate that you have to buy an annuity by age 75 if you have money left in your drawdown fund.
What are the pension drawdown rules after death?
It’s always worth writing a Will for your finances. But, by completing an expression of wish with your pension provider, your pension fund will be distributed to your beneficiaries as you wish. If you die before age 75, your pot could be paid to your beneficiaries tax-free, either through an annuity, lump-sum or regular income.
If you die over the age of 75, your pension pot can be paid to your beneficiaries but will be subject to income tax at a marginal rate.
Get independent financial advice on pension drawdown
If you’re looking for advice on how to take your pension or planning for your future retirement, call our team today on 0161 413 7051 or click here for more on pension drawdown.