Use your pot to provide a flexible retirement income – flexi-access drawdown
With this option you can normally take up to 25% 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 might be adjusted periodically depending on the performance of your investments.
Unlike with a lifetime annuity your income isn’t guaranteed for life – so you need to manage your investments 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, normally the first 25% is tax-free and the rest counts as taxable income. There might 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 whole amount as cash in one go if you wish. Normally, the first 25% 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 whole pot.
For example, it’s highly likely that you’ll be landed with a large 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.
Be sure to get financial advice before cashing in your whole pot.
Mixing your options
You don’t have to choose one option when deciding how to access your pension – you can mix and match as you like, and take cash and income at different times to suit your needs.
You can also keep saving into a pension if you wish, and get tax relief up to age 75.
Which option or combination is right for you will depend on:
- Your age and health
- When you stop or reduce your work
- Whether you have financial dependents
- Your income objectives and attitude to risk
- The size of your pension pot and other savings
- Whether your circumstances are likely to change in the future
- Any pension or other savings your spouse or partner has, if relevant