As retirement gets closer, there are a number of choices to be made, and we can help you assess what’s required and come to the right decision for you and your family.
One option is to use your pension fund to buy an annuity – a product that will pay you a regular retirement income for the rest of your life, although the income available will depend on annuity rates at the time of purchase and may be lower than expected. However, you might also consider flexi-access drawdown, which enables you to take your income directly from your retirement fund.* Before you decide which option is right for you, specialist advice is essential.
Defined contribution pensions
The rules around pension planning changed significantly in 2015, and since then, you are now able to access your defined contribution pension once you are 55 years old (raising to 57 in 2028). The level of income you can take is unrestricted, although you must pay your marginal income tax rate on any taxable withdrawals. It remains the case that you can still take up to 25% of your pension fund in the form of tax-free cash, although tax treatment depends on individual circumstances and may change in the future.
Defined contribution pensions can now be passed to anyone in the event of your death, rather than just being passed to a dependant. If beneficiaries take income from a defined contribution pension, it will be tax-free if death occurs before age 75, or will be paid at the beneficiary’s marginal rate if death occurs after age 75 – although this is set to change in April 2027. The tax treatment of pension benefits depends on individual circumstances and tax rules may change in the future.
‘Income drawdown’ will reduce the size of your pension fund and the investment growth may not be sufficient to maintain the level of income you wish to draw. If you withdraw money at a rate greater than the growth achieved by your investments, your remaining fund will reduce in value. The level of income you take will need to be reviewed if the fund becomes too small – this is more likely the higher the level of income you take.
The income you receive may be lower than the amount you could receive from an annuity, depending on the performance of your investments. As annuity rates can change substantially and rapidly, there is no guarantee that when you do purchase an annuity the rates will be favourable. This could mean that your pension thereafter may be less than you hoped for. The rules governing how much income you can take directly from your pension fund may change. This could mean that the income you can take from the investment no longer meets your requirements.