Everyone has retirement aspirations. But whether you’re planning to travel the world, devote more time to your grandchildren, or take a up a new hobby, your pension is the means of achieving the lifestyle you deserve when you stop working.
There are several options available when it comes to accessing your pension. Choosing the right combination of these allows you to tailor the use of your retirement savings to best suit your needs. Circumstances during retirement can change, so it’s important to consider solutions that will give you a degree of flexibility over time.
With more options than ever before for accessing your pension, you can be sure you’re in complete control of how you use your savings. But the variety of choices available once you stop work can seem overwhelming.
At CTT Private Client, our experienced professional financial advisers are here to discuss your retirement goals and help you put the best provisions in place for accessing your pension.
Here, we outline some of the different strategies for accessing your retirement funds and benefits with a focus on Defined Contribution (DC) pensions, with some additional information on Defined Benefit (DB) pensions.
Withdrawing from your pension pot
Once you reach the age of 55, you will have the option to access the savings in your pension pot. This age threshold is rising to 57 from 2028. In some cases, there may be the option to withdraw funds sooner if you are disabled or in the event you become seriously ill. These exceptions vary, however, and depend on the type of pension scheme you have in place.
If you choose to withdraw funds from your pension pot, you can access your retirement savings in several ways.
Drawdown is one way of taking funds directly from your pension pot. There are no limits to the amount you can withdraw, subject to the total value you have saved. Once you reach 55 (or 57, as of 2028), you can choose to move the full sum or part of it into drawdown and access this money as and when you see fit. You can withdraw the first 25 percent of your pension pot tax free; after that, Income Tax is charged at your marginal rate on any funds you choose to take out.
Partial and total withdrawal
This approach to using your retirement savings is known as Uncrystallised Funds Pension Lump Sum (UFPLS). It allows you to withdraw lump sums directly from your previously untouched DC pension. Although the 25% tax-free withdrawal limit still applies here, you may be charged emergency tax by HMRC on large sums, which you’ll need to claim back.
Of course, using income drawdown will cause your pension fund to deplete over time. There’s also a risk that the return on your investments may fall short of supporting the amount you wish to withdraw.
Withdrawing funds at a rate that outpaces your investment growth will significantly impact your pension pot. You should regularly reassess your income level if your fund shrinks, especially if you’re withdrawing a substantial amount of income, as the risk of this happening increases with higher-value withdrawals.
Using your pension as income
It’s possible to change your pension pot into an annual pension with the purchase of certain financial products. Buying an Annuity with your pension fund will future proof your savings, guaranteeing you have a set annual income for life.
Annuities aren’t as popular as they once were, but if you’re looking for a strategic approach to retirement planning, this could be a good way to make your pension work for you.
It’s not without its potential pitfalls, however. Annuity rates vary; they are often better value for older clients and seeking out an enhanced annuity will also help improve your rate.
But despite these positive indicators, Annuity rates are also susceptible to rapid, significant change.
There is no surefire way to guarantee optimal Annuity rates at the time of your purchase, and buying an Annuity when the rates are unfavourable could result in your annual pension being a lot less than you would ideally like.
Leaving your pension intact
Another approach is to leave your pension fund intact. It will still be at the mercy of market volatility, and although there are no certainties, there is also the chance it may continue to grow. This would mean that, when you decide to access your funds, you could be looking at a much larger tax-free lump sum.
If you choose to opt for this approach, CTT Private Client’s professional financial advisers offer bespoke advice to help you plan for the future of your pension fund.
The various options now available to those wishing to access their retirement savings means there’s more choice and flexibility in how you use your pension fund. With the right knowledge, insight, and guidance from Private Client’s professional financial advisers, we’ll help you create a bespoke solution to support the retirement you’ve dreamed of while making provision for the future.