If you’re over the age of 50, you’ve probably been contributing to a pension for many years and you may be looking forward to the day when you can finally retire and live off all your pension savings.
However, there’s a lot to think about when planning to withdraw money from your personal or workplace pension. It’s a huge decision because it can have major implications on how long your pension pot will last for your retirement.
If you prefer to listen to a podcast summary of the 5 things to consider, please scroll to the bottom or click here
When Can I Start Taking Money From My Pension?
Currently you are able to start taking your pension from the age of 55, but unless your private pension plan has a protected pension age, the normal minimum pension age (NMPA) is rising to 57 from April 2028. This is being done to coincide with the rise of state pension age to 67.
Once you’ve reached these ages, you can start accessing the money in your pension fund in a number of different ways, e.g:
take your pension savings as a single cash lump sum
take it as a regular income
a combination of a smaller lump sums alongside a regular retirement income
If you have a defined contribution pension pot you can use the funds to purchase an annuity (a regular income for life) or to take a cash lump sum, depending on the specific terms of your plan.
The first 25% of your pension drawdown is tax free, then remaining pot is treated as taxable income.
There are always some exceptions that entitle you to access your pension earlier (for example ill health), but you may have to pay higher fees to your pension provider.
It’s also important to understand the specific tax rules that apply to your pension and to consider how withdrawing money from your pension pots will affect your overall tax situation especially if you are in a higher tax bracket.
1) Pension Freedoms
The pension freedoms are a set of rules introduced in 2015 that give individuals more flexibility in how they access their personal pension savings.
You can now do a lot more with your pension pots than previously, but everyone is different and it’s important to find the right solution for your circumstances and what risks you are willing to take.
We often vastly underestimate this, but evidence shows we are mostly living longer, with a growing variation in healthy life expectancy.
In 1950 10.83% of the population in the UK were aged over 65.
By 2018 this had increased to 18% (11.9 million UK residents) and by 2050, this figure is projected to reach 17.7 million / 24.77%.
Those aged 85 and over are likely to be the fastest growing age group.
Does your pension pot provide a guaranteed income for life?
If you have a partner, do you need to provide for them financially after you die?
Or are you relying on them for your retirement income? What happens to their / your pension pot when you die?
It’s important to be aware of your potential life expectancy when planning for retirement, but remember that life expectancy is just an estimate and it can vary significantly from person to person. It’s therefore a good idea to save as much as you can for retirement, even if you think you may have a shorter life expectancy.
5) Obtain Professional Advice
A few of us may expect to give up work altogether in our fifties, but a growing number of us are dipping into our pension before our normal retirement age.
Before we get into the different ways you could withdraw money. There are some more general things to think about first.
And they include asking yourself:
How long will I need my money to last?
How long do I want to keep working?
How much tax might I pay?
Could, my health and lifestyle affect what I get?
How much do I want to leave behind?
Finally, a word of caution re pension scams.
Pension scams are fraudulent schemes that can target people who are looking to access their pension. These scams can take many different forms, but they often involve promises of high returns or other incentives to encourage you to transfer your pension to a new pension provider.
Scammers may use a variety of tactics to convince you to transfer your pension, such as cold calling, unsolicited emails, or online adverts. They may also use high-pressure sales tactics or try to rush you into making a decision.
If you are considering transferring your pension, it is important to be cautious and to thoroughly research any company or individual you are considering doing business with. Be especially wary of anyone who:
Pressures you to make a decision quickly
Claims to be able to unlock your pension
Asks you to transfer your pension to a scheme that is not regulated by the financial authorities
To watch a video about pension scams, please click the below:
Deciding to access your pension early, or make other pension choices like pausing / canceling your pension contributions are big decisiosn that shouldn’t be taken lightly. Be sure to consider all of the factors involved and as always, seek advice from an independent financial adviser before making any major decisions about your finances.
If you would like to discuss your pension options, get started with a free introductory 30 minute call:
Receive the latest TT Wealth Financial Planning Newsletter along with regular money tips by email:
Your email address will NEVER be shared or sold. You are always free to easily unsubscribe or customise your email preferences at any time. If you have any questions, please contact: firstname.lastname@example.org