A pension is simply a pot of money which is designed to grow, free of UK tax and provides an income when you are no longer working. You, your employer and the government can all pay into it. You can also pay into someone else’s pension pot, such as your spouse or children’s.
Pension contributions qualify for tax relief at your highest rate of income tax, unless your individual circumstances mean that it is subject to restrictions.
Then, from age 55 (57 from 2028), you have the option to take money out of your pension. There’s usually no deadline, but most people start accessing their pension when they cut down their working hours or stop working altogether.
The size of your retirement savings pot will depend on many things, including:
The decisions you make on how to draw your pension income can have lasting repercussions, and with increasing life expectancy it is crucial that you consider all the options available to you.
You may have heard the phrase ‘pension freedoms’ which simply means new legislation allowing greater flexibility in how you can draw your pension. The wide range of options available include taking it all as a lump sum or purchasing various types of annuity or drawdown, which are simply different ways of taking an income. It’s a complex area, so it’s worth speaking to your adviser in plenty of time to consider all the options.
Whilst drawing your pension as a lump sum may sound attractive, it may not always be the best course of action. Unless your pension pot is very small you could lose much of it to income tax if you draw it all in one year. It could also be challenging to make your money last over the course of your retirement, especially if the sum is just sitting in the bank earning very little interest. We can help you consider your options.
An annuity pays a guaranteed income for life and is the most common way to convert a pension into an income. You choose at the outset how you would like this income paid, the frequency of payments and whether you would like to include death benefits for your spouse. Once you have purchased an annuity, your plan will remain set for the remainder of your life. Many people find this strategy comforting, others may find it a little daunting, but at Aspect8 we will always help you choose a pension plan tailored to your aspirations, priorities and lifestyle.
Another common method of drawing your pension income is known as ‘drawdown’. This is often appropriate for larger pension pots and those who would like to retain greater flexibility than that offered by an annuity. This option allows your funds to remain invested in a pension, whilst you still draw an annual income. You have the ability to vary the income drawn to a certain extent while your fund continues to benefit from any further investment growth. This option also offers more flexible death benefits.
The guidance and/or advice contained within this website are subject to the UK regulatory regime, and are therefore targeted at consumers based in the UK. Aspect8 Ltd is a chartered member of Best Practice IFA Group Ltd which is authorised and regulated by the Financial Conduct Authority.