In April 2015 we saw the biggest change to how people can access their pensions:
There are six options available
- Leaving the pension pot untouched,
- Purchasing an annuity or guaranteed income for life,
- Receiving a flexible income (Flexi Access Drawdown),
- Taking cash in chunks (Uncrystallised Funds Pension Lump Sum),
- Cashing in the entire fund in one go and
- A combination of the above.
Leaving your pension pot untouched for now and take the money later. It’s up to you when you take your money; you may have received a pack from your pension provider but that doesn’t mean you have to take the money now.
You can use your whole or part of your pension pot to purchase an annuity or guaranteed income for life. There are different types of annuity available and if you decide to purchase an annuity you don’t have to go with the quote you are given by your pension provider. Instead, you can shop around and compare different annuity rates: this is what “Open Market Option” means.
Alternatively, you may qualify for an enhanced annuity that may pay you a better income than a normal annuity, as it takes into account your lifestyle as well as your medical and occupational history such as:
- Your previous occupation (if you have worked with asbestos for instance)
- If you’ve had a previous or current health problem that could limit your life expectancy (such as a heart attack or high blood pressure)
- Your postcode (life expectancy can vary quite a bit, depending on where you live)
While all of this is unpleasant to think about, you may be able to secure a far higher retirement income by purchasing an enhanced annuity.
Flexi Access Drawdown normally allows you to take up to 25% of the fund as tax free cash. The rest remains invested in a drawdown plan. You can then take as much or as little income from the fund as you choose. You can choose to take nothing at all or the entire fund in one go. Any income payments will be subject to income tax and taxed at your marginal rate.
Uncrystallised Funds Pension Lump Sum (UFPLS) is the alternative option to Flexi Access Drawdown. This also allows you to take money from your pension funds flexibly. From age 55 onwards you can choose to take lump sums directly from your pension fund 25% of any amount taken is tax free cash and the rest is taxed as income at your marginal rate.
As you can see many options are available and a number of pitfalls to avoid including running out of money too early and paying too much tax on your retirement income, so, please do the sensible thing and take independent financial advice before making any decisions on how to draw your retirement income especially as some decisions are irreversible.