When you reach retirement age, you have important choices to make. Reforms introduced from April 2015 drastically increased the amount of freedom and choice available for pension savers. Individuals can now choose how and when they access their pension pot, and can tailor their approach to their personal circumstances.
An annuity will provide a predictable income stream, but annuity rates are low and do not necessarily offer good value.
- Flexi-access drawdown: you can take up to 25% of your pension pot tax-free, and reinvest the remainder to generate a regular, taxable income. However, income is not guaranteed and you could run out of money.
- Take the entire pot as cash in a single withdrawal: 25% of each withdrawal is tax-free and the remaining 75% will incur income tax, so you could incur a substantial tax charge.
- Take lump sums when you choose: this spreads your 25% tax-free allowance. However, your pension provider might restrict the number of withdrawals you can make in a year, and you could incur a tax bill if your withdrawals push you into a higher income-tax bracket.
- Alternatively, you can leave your pension pot untouched until a later date, allowing it to continue to grow.
Above all, having spent years building up your pension pot, it’s important that you take time to make the right decision. Talk to your financial adviser; alternatively, Pension Wise (www.pensionwise.gov.uk) is a government-provided service that provides free, impartial guidance on your options.