If you’re reading this then no doubt you’ve heard about the pension changes that came into force in April this year and are wondering how this might affect your retirement. Introduced by the Government in an effort to offer retirees greater control over their financial future, the new rules are the biggest change to pensions in a generation. And while they present fantastic opportunities, they have also made some things more confusing.
What the changes mean
If you have a defined contribution pension – a personal or work pension scheme that you and/or your employer pay into, where your retirement income is based on how much the plan is worth, rather than being linked to your salary at retirement – you are directly affected by the new changes.
From the age of 55, you can access your pension savings and use them however you like. Under the old rules, only 25% of the pot was allowed to be withdrawn. The rest had to be used to arrange a retirement income, most commonly through the often-criticised annuity route.
All being well, your retirement could last 20 years or more, so the decisions you make upon retiring will have a huge bearing on your future and the lifestyle you can expect to lead in retirement. So what are your main pension options in retirement?
Option 1: Buy an annuity
Firstly, if your financial priority is to receive a guaranteed level of income for the rest of your life, then choosing to go down the traditional route of buying an annuity is the right choice. There are many types of annuities available and rates vary if you have a health or medical condition.
It’s absolutely vital to shop around, rather than just taking the annuity offered by your pension provider. For more information about annuities see our article
Option 2: Stay invested and take drawdown
Another option is to keep your pension fund invested and make withdrawals from it as and when you need to – known as drawdown. Because your fund is invested, if the investment grows you will benefit. You can choose to take an income or make withdrawals from the fund.
But be aware that how and where the fund continues to be invested could have a huge bearing on your future – especially as its value can rise and fall – and depending on how much you take out, you could run out of money before you intend to.
Option 3: Take it all out as a lump sum
Finally, you could withdraw the full pension fund in one lump sum – after all, you saved the money up over the years, so you have the right now to spend it as you see fit. However, you should be mindful of the tax implications of doing so – only 25% of what you access is tax-free, with the rest taxable at the relevant level of income tax.
If you are retired or approaching retirement you should consider taking professional financial advice, to help you make the right choice for you. You can find financial advisors in your area through the website Unbiased
What do you intend to do in retirement under the new freedoms? What affected your decision? Share your thoughts with others in the Forum
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This article has been commissioned by retiresavvy and any opinions voiced are the author's own.