Accessing Your Pension
by Ashley Biglin
Due to my recent study on pensions and financial report writing around accessing pension funds, I would like to share what I have learned over the past few months.
Many people rightly so, find pensions a complex area and are unclear on how they can access their pensions or the best way to access these from a tax conscious perspective.
It is not common knowledge that you can usually take 25% of your pension tax free, all pensions are invested in funds and can rise/fall with reactions to the stock market or that your pension can not be accessed legally until age 55, unless certain conditions apply.
In terms of accessing your pension, many still believe that their whole pension, accumulated over their lifetime, will one day be used to purchase an annuity – a level of guaranteed income. However, as of 6 April 2015, major changes to the way in which benefits could be taken were introduced, by allowing pensions to be accessed more freely.
Since 2015, these new pension freedoms in conjunction with falling stock markets, gilt yields and annuity rates over recent years, have led to many wishing to access their pensions in a flexible manner which best reflects their own personal circumstances. It is therefore important to assess your income needs in retirement and all sources of income, whether that be from your State Pension entitlement or savings you have built up over the years.
Looking back to July 2008, when a 65 year old, with a £100,000 pension fund was able to purchase an annuity on a level, single life basis and receive a guaranteed income of £7,908 per annum for the remainder of their life. Now, almost 10 years on, if a 65 year old with a £100,000 pension fund, were to purchase an annuity on the same basis, they would only receive a guaranteed income of £5,626 per annum. This shows that a 65 year old today with a £100,000 pension fund would receive £2,282 less per annum and £68,460 less over the remainder of their life, should they live to 95. (source: https://www.sharingpensions.co.uk/annuity-rates-chart-latest.htm).
These highlighted falling annuity rates, are just one reason why many people are now looking at the newly introduced pension flexibilities as a means of meeting their income requirements throughout retirement. But of course, annuities can still appear attractive to some, depending on personal circumstances. For example, if you have:
- A low attitude to risk;
- A low capacity for loss;
- A need for guaranteed income;
- A longer life expectancy based on family history; and
- A medical condition that will allow a possible enhanced annuity rate in the future.
Since pension accessibility has advanced from the days of annuities to now allow people to access their pensions in a flexible manner, whether that be by an uncrystallised funds pension lump sum (UFPLS), where 25% is usually tax free. Or by flexi-access drawdown, a technique to draw tax free cash, income or a mixture of both, in a way which best suits your needs and circumstances. Pension flexibility is now the most popular way to access pension funds throughout retirement.
It is worth noting that these new flexible benefit options apply to defined contribution pensions schemes only, these are pensions where your built-up fund and the benefits provided ultimately depend on the size of your fund at retirement. Alternatively, if your pension is held within the second type of pension – a defined benefit pension scheme, which generally provide a guaranteed portion of your final salary at retirement, then these pension flexibilities are not achievable.
If you’re approaching retirement and are concerned about your pensions and how they can be accessed, please feel free to contact us and arrange a meeting with one of our financial advisers, who will be more than happy to talk you through your pension possibilities for a retirement which best suits your needs and meets your desired retired lifestyle.
If you need financial advice to assist your retirement planning, give us a call on 01482 219 325, or email [email protected].
This article was originally published on 23/05/2018. Taxation reliefs, levels and bases can change in the future and the content of the article refers to our understanding of taxation legislation at the date shown. Tax is dependent on your own personal situation and circumstances and is subject to change based on UK legislation and taxation regime.