From April 2015, if you’ve saved into a ‘defined contribution’ pension (namely not a final salary or other salary-related pension), you’ve had the freedom to take money out of your pension as you wish. But what are the different ways you can access money in your pension?
Taking money from your pension
You don’t have to take all the money out of your pension in one go (in fact, you don’t have to do anything with it at all). And you don’t have to use all of your pension in the same way. Here are the main options:
1. Leave your money where it is
Just because you can take money out of your pension doesn’t mean you have to. You can leave it where it is. The advantages are that it – hopefully – continues to grow in a tax-free environment and you only pay tax on money once you take it out.
SAVVY TIP: Another advantage is that if you’re also working and have income from earnings, you can pay up to £40,000 a year (in tax year 2019/20) into your pension. Once you start taking money from your pension, you can only pay in up to £4,000 a year.
The main disadvantage is that it may not be invested in the best fund for your circumstances as you grow older. If your money is in a fund that has high charges, you will continue to pay those charges.
2. Take cash directly from your pension pot(s)
You can take money directly from your pension (if your pension provider will allow it) in small amounts as and when you want to. The technical term for it is an uncrystallised pension fund lump sum (UPFLS). In theory you can take as little or as much as you’d like. However, not all pension providers will let you do this.
- Some may impose minimum thresholds on the amount you can take out.
- Some may limit the number of withdrawals you can make in a 12-month period.
- Others they may impose extra charges or early encashment penalties if you want to take money out.
SAVVY TIP: You can read my article can you take money straight from your pension? and which pension companies will restrict you, in my article.
The first 25% of anything you take out of your pension is tax free, but the rest is taxable. That doesn’t necessarily mean you’ll have to pay tax on the remaining 75% because you have your personal allowance (the amount you can earn without paying tax). There’s more information on how to reduce your tax bill when you take money out of your pension on SavvyWoman.
3. Flexible, flexi or flexi-access drawdown
Here you reinvest your pension money into funds that are specifically designed to produce an income. You decide how much income you’d like to receive and you invest your pension pot into a fund or funds to produce the income. However:
- The amount of income you receive is not guaranteed.
- If the return isn’t high enough, your income may have to be adjusted down (which means you’d get a lower income).
SAVVY TIP: You don’t have to invest all of your pension pot into a fund or funds to produce an income and in any case you can take up to 25% of your fund as a tax-free cash lump sum.
4. Buy an annuity to generate an income for life
This is the option that’s always been available to people with a personal or defined contribution pension. Here you hand over your pension fund to an annuity provider.
SAVVY TIP: The annuity provider doesn’t have to be the same as the company you’ve saved your pension with. In fact, you’ll often get a much better deal if you shop around before you choose your annuity.
- There are different types of annuity, including ones that will pay an income to your husband, wife, civil partner or partner after you’ve died and ones that rise in line with inflation.
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