We spend much of our working lives saving for retirement, hoping to get the income we need to do everything we want once we are no longer tied down by a job. However, it used to be difficult to take the income how you wanted.
The tax-free lump sum was handy, of course, but buying an income for life with the rest (known as an annuity to its friends) didn’t suit everyone, particularly as many felt they had to do it whether they wanted to or not.
Then, things changed. Since 2015, everyone aged 55 or over can take money out of their pension whenever they want – and as much as they want. This is thanks to the introduction of “flexi-access drawdown”, where any money left in the pension just stays invested. In many cases, it can also stay in the same investments.
“You don’t have to take the 25pc tax-free lump sum straight away”
You can even choose to set up a regular income or make occasional withdrawals. Just keep in mind that the income is literally meant to last you a lifetime and it could be subject to income tax. If you take too much, or your investments don’t produce enough growth, there is the real possibility it could run out before you do.
That said, you can change the level of income you receive whenever you need to. Many people do this to reflect changes in their lives – for example, funding a big trip early on in retirement or buying a new car.
Some people even use drawdown with the intention of never taking all the money out. This is because anything left in your pension account when you pass away remains outside your estate, so it can potentially be passed on free of inheritance tax. Any money paid out on death before age 75 is usually tax-free and any money paid out after age 75 is usually taxable at the recipient’s highest rate of tax.
Talking of tax-free cash, it’s worth keeping in mind that you don’t have to take it straight away, especially if you don’t need it for anything in particular at that time.
Not all pensions offer drawdown or the option to withdraw lump sums, so you may need to transfer your pension pot to a provider that does. For example, the Fidelity Sipp (self-invested personal pension) offers complete flexibility in how you can take money from your pension, as well as the potential for more investment choice and low charges normally.
There’s clearly a lot to think about when it comes to retirement income, and often an approach that incorporates both guaranteed income and flexible income can make the most sense. You may find it helpful to get support from one of the specialists in Fidelity’s retirement service. Just call 0800 860 0046 or visit fidelity.co.uk for free, helpful guidance on your retirement income options.
The Government’s Pension Wise service offers free, impartial guidance to help you understand your options at reirement. You can access the guidance online at pensionwise.gov.uk or over the phone on 0800 138 3944.
Points to bear in mind
The value of investments and the income from them can go down as well as up so you may get back less than you invest. This information is not a personal recommendation for any particular investment. Tax treatment depends on individual circumstances and all tax rules may change in the future.
Withdrawals from a pension product will not normally be possible until you reach age 55. It’s important to understand that pension transfers are a complex area and may not be suitable for everyone. Before going ahead with a pension transfer, we strongly recommend that you undertake a full comparison of the benefits, charges and features offered.
To find out what else you should consider before transferring, please read our transfer factsheet at fidelity.co.uk/transfer. If you are in any doubt whether or not a pension transfer is suitable for you we strongly suggest that you seek advice from an authorised financial adviser.