Many people are confused about their options when it comes to turning their pension pot (savings) into retirement income like to check it out click for Brighthouse Shield Annuities.
If you are a member of a defined benefit (DB) workplace pension scheme, your options may be limited. The guide from MoneyHelper explains how these schemes work.
But for any defined contribution (DC) personal or workplace scheme that you have been saving into, you will typically have more flexibility. The choices can be somewhat confusing, so hopefully this short introduction to your options will help you understand how things work.
Thanks to the Pension Freedoms introduced in 2015, there are a number of options open to you when you have access to your DC pension savings from age 55 (changing to 57 in April 2028).
No matter what option you take, you are typically first able to access up to 25% of your DC pension pot as a tax-free lump sum. You can take a bigger lump sum if you wish, but anything over your 25% tax-free allowance will be taxable.
Whether you take a lump sum or not, you then have these options for your pension savings:
- Buy an annuity.
An annuity provides a guaranteed income for life or a specific period. You use your pension savings to buy an annuity from an insurance company. The amount you receive depends on factors like your age, health and the type of annuity chosen – such as a lifetime annuity or fixed term annuity. You may welcome the reassurance of guaranteed income, but the trade-off is a lack of potential for further investment growth from your pension savings.
- Flexi-access drawdown.
With flexi-access drawdown, you ask a specialist drawdown provider to invest your pension savings. You then have the ability to take ad-hoc lump sums or regular income until your money runs out. Remember however that the value of your pension savings can go up or down while they are invested.
- Leave your money in your pension scheme.
You can leave your pensions savings where they are, where they will remain invested. This option allows you to take lump sums directly from your pension fund, while the rest remains invested. If you don’t take an initial tax-free lump sum, 25% of each withdrawal is tax-free, and the remaining 75% is subject to income tax. This option offers flexibility but may not be tax-efficient for larger withdrawals.
- Mix and match.
You can combine these options based on your needs. For example, you might use part of your pension to purchase an annuity for essential expenses and keep the rest in drawdown for flexibility.
What else should I consider?
Although these options may seem straightforward, there are a number of factors to consider when making a decision that’s right for you. For example, there may be tax implications of your chosen option. You should also think about your attitude to risk: an annuity might be suitable if you wish to avoid any investment risk in retirement, for example.
You should also think about your other income sources, and where your defined contribution pension fits in. Other sources of income could include the State Pension, money from a defined benefit (final salary) pension, your savings, and the availability of other options such as remortgaging, downsizing and equity release.
This is why you may decide to seek professional financial advice before making any decisions. An adviser can help assess your individual circumstances, risk tolerance and financial goals to tailor a retirement strategy that suits you.
Another useful source of help is the government-backed Pension Wise service. This gives everyone aged over 50 access to free and impartial guidance on options for the money in your defined contribution pension pots.
Remember, everyone’s situation is unique, so it’s essential to carefully consider your options, ideally seeking guidance or advice tailored to your circumstances.
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