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Tax-free Cash
A pension review can be a complicated thing. At its heart, each pensioner wants their pension pot to be worth as much as possible so it can last as long as possible with the highest standard of living possible for that time. But there is many a retirement option available to them when planning. Tax-free lump sums and tax-free cash amounts come into that planning, but how exactly do they help a person improve their retirement income? And what exactly does tax-free cash mean when it comes to pensions?
When it comes to tax and pensions, most UK taxpayers will not pay tax on their pension if their earnings/pension income is less than the Personal Allowance. Personal allowances change according to the Government’s annual budget so if you are earning just a little over the personal allowance limit at the moment, it could be in the future that your pension income will not be taxed. Conducting a thorough pension review will highlight if this is the case for you when you consider what retirement option is right for you.
A pension review tailored to you will help you highlight which retirement option is most beneficial for you specifically.
However, for those that do have an income from their pension over the personal allowance limit, they will need to pay tax. However, there are laws and rules in place to help people reduce their tax payments to make their pension pots go that much further. Again, a pension review tailored to you will help you highlight which retirement option is most beneficial for you specifically. In the main, however, most UK taxpayers can take out 25% of their pension pot tax-free. Importantly, that amount does not go towards a person’s personal allowance. However, you may have to pay a higher income tax bill at a higher rate if you take an amount from your pension that is so big it pushes you into another income tax bracket. Some individuals choose to take out many withdrawals. Each one has a 25% tax-free amount, with the remaining 75% seen as taxable income.
If you are unwell or very old, it is highly beneficial to carry out a pension review to see how it affects what retirement option or options you have at such a stage in your life. For, you can actually take the full amount of your pension (if you have so far left it untouched) without being taxed. So, if your life expectancy is sadly less than a year, you can take one big tax-free lump sum. However, there are strict rules surrounding this instance and you must hit all three criteria the Government set. Currently, they are: life expectancy being less than a year due to a terminal illness, being under 75 and having less than the lifetime allowance of pension savings (currently £1,073,100).
Additionally, when it comes to tax and pensions, it is good to know the implications that tax has on your savings. Any pension review will take such implications into account. Usually, your contributions towards your pension are done before tax is calculated. As a result, you will find that the amount of tax you owe the government is reduced and it is a tax-efficient way of saving towards your retirement. In fact, as a UK taxpayer, you can get tax relief on your pension contributions of either 100% of your earnings or £40,000 (known as your annual allowance). Whichever is lower is the amount that you can gain that tax relief on. Any unused annual allowances can be carried forward for up to three years if you have been part of a pension scheme in that time.
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Drawdown
Drawdown is a term used with respect to defined contribution pension schemes and retirement income. In short, a drawdown refers to when a pension plan holder takes money from their pension pot so as to provide themselves with an income. However, a pension plan holder does not withdraw all their funds from their pension pot at one time in one big lump sum. Instead, they leave a portion of their contribution in their pension pot with a view to seeing that pension pot continue to grow to bolster future retirement income.
The obvious benefit of this is that your money may still be earning money, as opposed to the alternative. That alternative is that you buy an annuity with the entirety of your pension pot for the rest of your retirement. Seeking pension advice will help you come to the right decision for your needs. For, while you may gain peace of mind and comfort that comes from an annuity, if your investments do well in your pension pot, you may still be earning a good deal of money in your retirement. It can therefore provide you with a higher standard of living than your annuity plan could do. However, the offset of that is the risk that your investments do not grow - or worse they lose money. Knowing what you retirement income will be is one of the fundamental outcomes of any pension advice you receive.
How much you take out of your pension pot each year is usually down to you, but it takes some careful consideration of the factors involved -again, something pension advice can help with. Think about the tax implications that withdrawing from your pension has on the amount you have built up over the years and how that impacts your retirement income. Normally, you can take 25% out tax-free. In some instances, people may have a capped drawdown which means there are certain limits on how much they can take out of their pension pot as retirement income, but that can provide other benefits.
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Annuities
Pensions and annuities are often two terms that are used in close conjunction with one another. The reason being is that many pension plan holders choose to use their pension pot to buy themselves an annuity for their retirement. But what is an annuity? Put exactly, an annuity is a financial insurance product that an individual buys for a set amount of money. For that amount of money, the annuity provider gives them a certain amount of money each year for the rest of a person’s life - it will act as that person’s retirement income.
The trouble with annuities is that you have to take your best bet at how long you will live. Buying one is often best done after solid pension advice. In reality, it could be that you use your pension savings to buy an annuity that you and your annuity provider believe will continue for around 30 years. However, if you die within two or three years, that’s a lot of cash that has been spent that your estate will not receive directly back - though your annuity can go a spouse or child. For that reason, providers work out annuities at a rate that depends on the amount you have saved, your age and your health to come to your retirement income. The older you are, the better the rate you receive as providers bank on making fewer payments.
One of the benefits pension advice will often say about annuities is that they provide comfort and security. Plus some providers will swap paying the same amount of money for the rest of your life for index-linked payments for a shorter duration of time, which may be how you prefer to receive your retirement income.
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Unlike most other pension review companies our advisers can review your pension over video call.
A traditional financial or pension review meeting brought into the 21st century.
- Face to face meeting.
- Free pension Review
- No covid risk
- Quick and easy to do.
- Reduced travel time and costs. The oldest recognised benefit of video conferencing is reduced travel time and expenses. Meaning lower fees.
- Structured meetings with improved communications
- Better for the environment.
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Pension Withdrawal
How a person withdraws from their pension pot will depend on their own individual circumstances. When it comes to pension planning, everyone is different down to their age, income, health and outgoings. The main options that people with a pension pot have available to them are: to take out the entire amount, withdraw lump sums from the pot to form an income or use the pot to buy an annuity. Which pension withdrawal you choose should be done on the back of professional pension advice.
Each method needs careful consideration as each one has ramifications on how much money you will receive at any one time. While some people like the certainty and comfort that buying an annuity can give as a pension withdrawal- there are drawbacks to them. Some will not offer you an annuity rate that provides you with a regular income high enough for the standard of living you aspire to. As a result, making your pension pot grow by adding to it for longer and letting it earn interest can be a better option. The disadvantage to this, other than putting off retirement after a long career, is that you may not need a bigger pension pot as you may pass away earlier than you anticipated. Pension advice will help you weigh up these pros and cons to what pension withdrawal option is best for your requirements.
Lump sums are also something that needs to be examined carefully when it comes to your overall income when you seek pension advice. Plus, what you intend to do with that lump sum whicb you take as a pension withdrawal. For some people, it will be a sizeable amount that they may not feel comfortable having in their bank account. Plus, arguably, that is not an effective way of having your money work for you - simply by having it sit there in a non-interest-bearing account. However, not withdrawing it means you do not benefit from the tax savings you are allowed each year. As ever, good, professional pension advice will work this through with you.
As a result, pension withdrawal takes as much planning as deciding where and how to save for your retirement too. Pension advice will ask you to look at your future and consider your outgoings versus your income. Many pensioners will have paid off their mortgage, but there are still basic things that you will need to pay for over the course of your life. Plus, do you have any healthcare plans in place? The need for healthcare outside of what the NHS can and will provide is growing for many, and your pension may need to be able to cover the difference.
Additionally, you may want to consider your estate when it comes to your pension too. Making sure that you have enough to live on, but also leave as much as possible to your children and spouse, is what many people want. There are definitely ways that people can use their pension pots to maximise the amount they leave to their heirs within the legal remit of the law - while still making a pension withdrawal. Working with a pension and financial adviser to seek pension advice is one of the best ways to ensure that your pension withdrawal or withdrawals are as tax efficient as possible so that you do not pay over and above what you need to - thus leaving you with more spare cash for your retirement and your estate.
We can conduct secure online and telephone pension reviews, providing the same excellent service as meeting your pension adviser face to face.
We help customers review all pension providers including all the below
