Other factors to consider
Seeking financial advice
A financial adviser can assess your personal and financial circumstances carefully and give recommendations based on your individual circumstances. A financial adviser has the knowledge, skills and experience to review your investment objectives, current and future income requirements, existing pension assets and attitude to risk, in order to come up with the best retirement option for you. You can find a financial adviser through Unbiased’s website.
Guidance on retirement benefits from Pension Wise
Even if you do not want to obtain advice from an independent financial adviser, if you are aged 50 or over you can still receive pension guidance tailored to your individual circumstances from Pension Wise, which is a service provided free of charge by the government.
By contacting Pension Wise, you will receive information on the options available to you regarding your pension savings and retirement benefits. Pension Wise will look at your personal situation and advise you on the choices that best fit your position in the current climate.
Visit the Pension Wise website or call 0800 138 3944 to book a free appointment with one of their advisers.
Dependents and sustainability of your retirement income
Your pension is designed to help support you financially in your retirement. This could be for a long period of time, so it’s important that you make your pension fund last as long as possible.
You don’t need to take benefits at your nominated retirement date.
You should consider if your pension savings are likely to provide you with the income you require when you retire, and how accessing benefits will affect how long the fund lasts in the future.
If you spend your entire pension fund in the early years of retirement, you could have little or no money left to support your standard of living in later life. This is irreversible and could impact not only on you, but also your family, should they be financially dependent on you.
If your main concern is to provide benefits for your dependants, the amount they will receive will be affected by the decision you make in relation to accessing your pension savings or leaving your pension as it is. Accessing your benefits before your nominated retirement date will affect your ability to fund income later in life or beyond for your dependants or beneficiaries.
Your state of health at retirement
If you’re suffering from ill health at the time of taking your retirement savings, you should seek guidance from Pension Wise or financial advice from an appropriately regulated financial adviser as mentioned above.
Ill health could mean you can access your pension benefits early, or that you are eligible for ill health retirement options. These may include enhanced/ill health annuities which could be in the form of a fixed term or lifetime income in exchange for a lump sum from your pension which takes into account your ill health.
Taking benefits for any other reason than providing you with an income in retirement
Your pension is there to fund your expenses in later life when you no longer wish to work or when you are not able to earn an income to live on. There are risks from taking your money out of your pension too quickly which may affect how long your pension savings actually last. You should be aware that making decisions based on circumstances now can have effects on your financial wellbeing in the long run.
Tax implications of taking retirements benefits
You can usually take up to 25% of the value of your pension pot tax-free*, but any withdrawals above that are deemed as taxable income and will be subject to income tax accordingly.
You should therefore consider your own personal tax circumstances and think about what is the best option for you to access your pension retirement fund. Taking a large amount of your pension income in one go may mean that more is deducted as tax compared to taking it in smaller stages.
Taking a taxable lump sum from your pension could have an impact on the overall amount of tax you will pay – for example, depending on the amount withdrawn, it may put you into a higher tax bracket than you would normally be in, meaning that any income you receive from other sources will be subject to greater tax deductions.
*If you have an entitlement to a protected tax-free cash lump sum, you may be able to take a tax-free lump sum which is greater than 25%. The scheme administrator at the time may have checked whether this applied to you in April 2006 and recorded it against your records. If you have not received written confirmation but think you may have qualified for protected tax free cash as at April 2006, you should contact Smart Pension for clarification.
Means-tested state benefits
If you are in receipt of state benefits or any other source of financial support that is means-tested, taking benefits from your pension could result in these being withdrawn if you hold over a certain amount in savings and investments. It is important that you seek appropriate advice and guidance before accessing funds from your pension. When you take money out of your pension, it becomes personal savings and this means it would be included in any calculations for means-tested support.
When you take money out of your pension, it is classified as personal savings. If (after taking your benefits) you need to go into long-term care, your local authority will take these personal savings into account when calculating the financial support that you may be entitled to. This could result in you having to make a larger contribution to your long-term care costs, or having to fund them entirely yourself.
Debts and bankruptcy
Once pension savings are paid to you, the money is classified as personal savings. If you subsequently default on a debt or become bankrupt, your creditors will have a right to this money because it belongs to you.
Taking your pension savings as a lump sum
If you take all your pension savings as a lump sum under the Small Fund Commutation rules (up to £10,000), you will receive 25% of your pension savings tax-free. The remainder of your pension savings will be taxed at your marginal rate of income tax.
You may also be able to take your pension fund as an Uncrystallised Fund Pension Lump Sum (UFPLS). You will receive 25% of your pension savings tax-free. The rest of your pension savings will be taxed at your marginal rate of income tax.
If you take your pension savings as a lump sum, it could affect how much you pay in income tax. You may end up paying too much, or not enough, and you will need to talk to HMRC to agree your correct income tax position.
Taking a flexible income (income drawdown)
If you take your pension savings as a flexible income, you will receive 25% of your pension savings tax-free. The remainder of your pension savings will be taxed at your marginal rate of income tax. Please note that if you take your pension savings as a flexible income, doing so could affect how much you pay in income tax.
If you take your pension savings and then invest them in other savings products, you may not receive the same tax relief.
Any pension savings you do not take will continue to be invested and the value will be subject to market fluctuations. Any pension savings you leave invested in your Smart Pension account will still be subject to charges.
Using your pension savings to buy an annuity
If you would like a guaranteed income in retirement, you could buy an annuity. You should be aware that a range of different annuities is available, each offering different features. This means you should shop around to find the best option for you.
Most members can now access an annuity service. Please refer to the retirement options guide for further information.
You can also use the MoneyHelper to compare products that provide a guaranteed income for life or for a fixed term annuity.
If you are in ill health or suffer from/have suffered from a medical condition that is likely to reduce your life expectancy, this may enable you to obtain a higher starting annuity income.
If you do not choose an annuity which goes up with the increases in inflation each year, there is the risk your retirement income may not maintain its spending power, especially over the medium to long term.
Once you have bought a guaranteed income, you can’t change your mind. This means you won’t have the flexibility to change your income if your circumstances change.