Flexibility to use your pension pot in the way that suits your needs

Financial decisions are some what very important, some more important than others and of those being adequate financial provision for retirement.  However sometimes for some people this can be a daunting topic and the options they find that they have can be sometimes overwhelming. There for some people decide to seek independent financial advice from a professional adviser so the options can be explained more better, they can have their questions answered but to also be given advice on what option or options would be best for their own personal circumstances.

The reforms which were announced back in the 2014 Budget and extended this year now gives you the flexibility to use your pension pot in the way that suits your needs best, with the aim and help of creating better financial outcomes for you and your family members.

As long as you are over the age of 55, you have unlimited access to any Defined Contribution (DC) pension pot – to save, spend or invest as you see fit.

For many people, retirement now represents an opportunity to realise life-long ambitions, pursue new passions or help family members with their income needs.

Understanding the options
There is no easy answer or ‘one-size-fits-all’ solution, so it is important to understand the options. You do not have to choose just one option, and you may find that a ‘mix and match’ approach is the most appropriate for your situation.

Leave your pension pot untouched
You may be able to delay taking your pension until a later date. Your pot then continues to grow tax-free, potentially providing more income once you access it.

Use your pot to buy a guaranteed income for life – an annuity
You can choose to take up to a quarter (25%) of your pot as a one-off tax-free lump sum, then convert the rest into a taxable income for life called an ‘annuity’. There are different lifetime annuity options and features to choose from that affect how much income you would receive. You can also choose to provide an income for life for a dependant or other beneficiary after you die.

Use your pot to provide a flexible retirement income – flexi-access drawdown
With this option, you take up to 25% (a quarter) of your pension pot or of the amount you allocate for drawdown as a tax-free lump sum, then re-invest the rest into funds designed to provide you with a regular taxable income. You set the income you want, though this may be adjusted periodically depending on the performance of your investments. Unlike with a lifetime annuity, your income isn’t guaranteed for life – so your investments need to be managed carefully.

Take small cash sums from your pot
You can use your existing pension pot to take cash as and when you need it and leave the rest untouched where it can continue to grow tax-free. For each cash withdrawal, the first 25% (quarter) is tax-free, and the rest counts as taxable income. There may be charges each time you make a cash withdrawal and/or limits on how many withdrawals you can make each year.
With this option, your pension pot isn’t re-invested into new funds specifically chosen to pay you a regular income, and it won’t provide for a dependant after you die. There are also more tax implications to consider than with the previous two options.

Take your whole pot as cash
Cashing in your pension pot will not give you a secure retirement income.

You could close your pension pot and take the entire amount as cash in one go if you wish. The first 25% (quarter) will be tax-free, and the rest will be taxed at your highest tax rate – by adding it to the rest of your income.

There are many risks associated with cashing in your entire pot. For example, it’s highly likely that you’ll be subject to a significant tax bill, it won’t pay you or any dependant a regular income and, without very careful planning, you could run out of money and have nothing to live on in retirement.

If you wish to seek independent financial advice we at Hutt Professional have financial advisers with many years of experience who would be more than happy to offer you the independent financial advice you need. If you are located in Leamington Spa or surrounding areas please do not hesitate to contact us as we would be more than happy to appoint you with the best independent financial adviser for yourself.