I was sitting with a client the other day who is about to retire aged 55. For the next 17 years he is planning to use his personal pension as a source of income until his State Pension starts.
We were going through the different ways he can make withdrawals from his personal pension and the tax implications of each method.
He has opted for pension drawdown as opposed to buying an annuity. Before every retirement we will always do a full analysis and compare the two ways of taking an income from your pension. It just so happens that in this particular case the flexibility of pension drawdown is perfect for him.
What he found fascinating was just how flexible pension drawdown can be.
Making sure you have the right type of pension
In a moment I will explain just how flexible pension drawdown can be but before I do it’s worth pointing out that not every personal pension will offer the full flexible benefits of pension drawdown.
Most older style pensions will need to be transferred to a Self Invested Personal Pension (SIPP) to benefit from the full range of withdrawal options.
Moving to a newer style pension will also probably provide the added benefits of cheaper charges.
You also need to be 55 or over in order to make withdrawals from your pension.
2 ways to take money out of your pension using pension drawdown
#1 – One-off lump sum
Make a large or small withdrawal as a one off.
If you’ve never withdrawn before, up to 25% of your pension value could be taken as a tax free lump sum. You don’t need to take all your tax free cash in one go though. You could just take a bit of it now and save the rest for another day.
Even if you have already taken all of your tax free cash, you can still take one off lump sum withdrawals. They will just be subject to Income Tax at your marginal rate.
#2 – A series of payments
I find that when most clients come to retire it is best to set up a regular monthly withdrawal from their pension as it can help replace the salary they are used to receiving monthly.
Again each monthly withdrawal can be tax free, taxable or a mixture of both.
You can also increase, decrease or stop and restart the monthly payments anytime you want. This is really handy when you start receiving your State Pension as you might not need as much income from your personal pension at this point.
Other benefits of pension drawdown
Finally let’s not forget about some of the other benefits of pension drawdown.
- Whatever is left in your pension pot can be inherited by your beneficiaries Inheritance Tax free. There may be an Income Tax charge paid by the beneficiary if you die after age 75.
- You can still decide to purchase an annuity at a later date when you don’t need the flexibility of pension drawdown.
- Your money stays invested so there is the chance of still growing your pension even though you are making withdrawals.
Would you like to ensure you have the right pension in place to facilitate pension drawdown? Would you like to find out about the ways pension drawdown can be used cleverly to provide you with an income and at the same time reduce your taxes? Then let’s have a chat and at least explore your options. Please get in touch for a no obligation chat at our expense.
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.