Cultivating and safeguarding your pension

How to utilise your pension pot doesn’t have a singular ‘correct’ approach

Retirement, for the majority, is primarily financed by a pension. Hence, it’s paramount to establish a solid strategy that empowers you to cultivate and safeguard your pension, both presently and in the future. With its continuously evolving rules and regulations, the pension system can often seem like a labyrinth, deterring many from employing it as a savings tool.

Deciding how to utilise your pension pot doesn’t have a singular ‘correct’ approach. Typically, you can commence your Defined Contribution pension when you reach 55 – a detail best verified with your pension provider. In specific situations, such as retirement due to ill health, your pension might be accessible earlier.

Considering your options

Unutilised pension pot, patience could be profitable
The decision regarding when to withdraw your money rests solely with you. You might have reached your scheme’s normal retirement date or received a pack from your pension provider, but it doesn’t necessitate immediate withdrawal. By postponing your pension to a later date, your pot can continue to grow tax-free, offering more income once accessed. If you choose not to take your money, we can scrutinise the investments and charges under the contract.

Assured income via an annuity, an option worth considering
Your entire pension pot, or a portion thereof, can be used to purchase an annuity, which typically provides a regular and guaranteed income. Generally, you can withdraw up to a quarter (25%) of your pot as a one-off tax-free lump sum and then convert the rest into an annuity, providing a taxable income for life.

Annuities in recent years have often been overlooked in the retirement planning conversation. But current heightened interest rates have increased demand for annuities, offering unparalleled peace of mind, knowing that your basic needs will be covered, irrespective of how the financial markets perform.

Tailoring your desired revenue stream is essential Adjustable income via flexi-access drawdown
This option allows you to typically take up to 25% (one quarter) of your pension pot, or of the amount allocated for drawdown, as a tax-free lump sum. The rest is then re-invested into funds designed to provide a regular taxable income. The income level you set may be adjusted periodically depending on the performance of your investments. Unlike with a lifetime annuity, your income isn’t guaranteed for life, necessitating careful investment management.

Withdrawing money is an absolute
Your control over how much and when you withdraw your money is absolute. You can use your existing pension pot to take cash as and when needed, leaving the rest untouched to continue growing tax-free. The first 25% (quarter) is tax-free for each cash withdrawal, with the remaining amount counted as taxable income.

Remember, there may be charges each time you make a cash withdrawal and/or limits on how many withdrawals you can make each year. With this option, your pension pot isn’t re-invested into new funds specifically chosen to pay you a regular income, and it won’t provide for a dependent after you die. It’s also important to consider the accompanying tax implications that we can discuss with you.

Liquidating your pension pot, think twice
Cashing in your entire pension pot in one go is an option. However, it’s important to consider all the implications before making such a decision. Withdrawing all your pension funds at once could lead to substantial tax liabilities. For most individuals, opting for this approach could result in a hefty tax bill, and considering other alternatives is usually more tax-efficient. Cashing in your pension pot doesn’t guarantee a stable retirement income.

Flexibility to diversify your options
When it comes to accessing your pension, you’re not limited to a single choice. You can blend different options over time or across your total pension pot. Mix and match according to your needs, drawing cash and income at various stages that best suit your circumstances. Plus, you can continue contributing to your pension and benefit from tax relief until the age of 75.

Assessing your financial status at retirement
Your financial situation at retirement will largely determine your income strategy from your pension. Considerations such as whether you’ll still be servicing a mortgage or dealing with significant debts are critical.

What other income sources, besides the State Pension, will you have at your disposal?
An annuity brings the security of a guaranteed regular income, while a drawdown plan offers the possibility to grow your pension and overall wealth during retirement. The latter is likely more appealing to those with a higher risk appetite, as market volatility could potentially seriously impact your pension savings.