The good news is that you are likely to have much more options than previous generations of retirees had with their pensions. That is thanks to pension freedom legislation introduced by the UK government in 2015.
You can now draw your pension funds from the age of fifty-five, and you have various options for how you take your money. Therefore, you have more flexibility as to how and when you fully retire. However, not all pensions are eligible for early access, so you need to check first before making retirement plans.
One option you have is to access your pension funds as a lump sum. Doing this could help you get around a particular financial need or significant capital expense. However, if you decide to go down this route, you should be aware of its consequences for your retirement income.
Achieving the right balance can be challenging. This article aims to inform you of the options available for your pension and how you can achieve an effective financial balance.
Changes to the Retirement Environment
Nowadays, the pension environment can appear confusing at first glance. However, at the same time as the government is increasing the age at which people can receive the State pension, they are lowering the age at which you can access your pension funds. If you are confused by this, there is no need to be.
The State Pension age is increasing because the population is living longer and is generally fitter and healthier than previous generations. Therefore, the money you have put aside for your retirement will sustain you for more active retirement and a longer one.
Pension Freedom
Pension freedoms were introduced in 2015 to support the new retirement environment. Rather than having to wait until your mid-60s to access your funds, like previous generations, you can now access them from fifty-five. This early access allows you to tailor your retirement, potentially tapering off gradually from full employment to complete retirement.
Taking a large lump sum at fifty-five might seem appealing. However, you should remember that the initial reason for investing in a pension fund was to provide you with an income when you retire. So, taking too much out in one go will diminish your fund considerably and give you less income when you retire. Therefore, before making any decisions about your pension fund, you should seek regulated financial advice.
Your Options
We’ve talked a lot already about your options, but you may be wondering what they are exactly? You generally have three options as follows:
- Tax-Free Lump Sum
- Pension Release
- Draw Down
Tax-Free Lump Sum
If you want to take a lump sum of cash from your pension at fifty-five, the first 25% is tax-free. Taking this option is ideal if you have to pay for a significant event such as a wedding or house purchase. Any money that you leave in your pension pot will remain invested in providing an income when you retire.
Pension Release
Taking money from your pension is called pension release, and you can take out your money in lump sums of cash as often as you want. However, you should be aware that it is only the first 25% of your tax-free money. Any sums above this amount will be subject to tax. Therefore, taking over 25% can have a significant impact on your annual tax bill.
Before taking out any money from your pension, you should speak with a regulated financial advisor. They can advise you on your best options, ensuring you get the maximum value from your pension savings.
Draw Down
You can also draw down your pension in the form of a regular income, with the first 25% being tax-free. This option provides you with a way of boosting your income if you decide to retire early or work part-time leading up to your full retirement.
Does Pension Freedom Apply to Everyone?
As long as their pension qualifies, everyone has access to pension freedoms, but not all pensions are eligible. Private, workplace and company pensions qualify, as do some final salary schemes. However, pension freedom does not apply to unfunded pensions or the State Pension. You may be able to transfer a non-qualifying pension to a fund that allows your pension freedoms. If you consider this option, you should get advice from a regulated financial advisor before making any decision.
Conclusion
You are likely to have much more choice with what to do with your pension at fifty-five than previous generations. First, you can check with a financial advisor as to your pension’s suitability for pension freedom. Then, decide whether to access it early or leave it invested until your retirement. Remember, taking money from your pension early could diminish your fund considerably and give you less income when you retire. Therefore, before making any decisions about your pension fund, you should seek regulated financial advice.
When looking at options for your pension, consider using a regulated financial adviser like Portafina or, view the info at Pension Wise.