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Pensions Reform and Planning

The pension reforms mean that those approaching retirement now have greater flexibility over what they can do with their pension savings. It is even more important to consider how much money you will need to maintain the lifestyle you’d like for the full length of your retirement. You’ll also need to consider income, tax and inheritance.

Dipping in and out – taking small cash sums

You can leave your pension pot invested and take out lump sums when you need them. The first 25% of any withdrawal is tax-free and the rest is taxable. Not all schemes provide this option and some providers allow you a maximum number of withdrawals each year. Because the investments in your existing pension pot are not designed to produce a regular retirement income and the value of these investments could fall it’s especially important to keep them under regular review to reduce the chances of running out of money.

Buy an annuity

A lifetime annuity provides you with a regular retirement income for life – with the guarantee that the money won’t run out before you die.

There are different types of annuities available:

  • Basic life time annuities offer a range of income options to suit different personal circumstances and attitudes to risk.
  • With investment linked annuities, your income will vary depending on the performance of the funds your annuity invests in.
  • Flexible annuities offer flexibility over income payments, investment options and death benefits.

It’s important you choose the type and features best suited to your personal circumstances, your life expectancy and your attitude to risk. Shop around!

You can take up to 25% of your pension pot as a tax-free lump sum and use the rest to buy an annuity.

Flexible income drawdown  

With a flexible income drawdown your money is placed in various investments and you can draw an income from this that suits you. This scheme can be with your own or another provider. Although you can choose how much income and what lump sums you take, the income is not guaranteed for life. If your investments fall in value you may have to adjust the amounts you take so you don’t run out of money later on.

You can choose to take up to 25 per cent  of your pension pot as a tax-free lump sum at the outset and you then pay your highest rate of tax on any withdrawals.

Leave your pension pot untouched

If you already have enough income to live on, you may be able to delay using your pension pot beyond your selected retirement date, or your scheme’s normal retirement date. You can continue to get tax relief on pension savings of up to £40,000 each year (tax year 2015-16) until age 75 and your pot will continue to grow until you need it.

Mix 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. Whichever option you choose, be sure to keep your funds under regular review so they continue to meet your long-term retirement income needs.

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