When you come to take benefits from a pension scheme it is usual to take or receive a tax free cash sum income as follows:
- A tax free lump sum or Pension Commencement lump sum. This is usually up to 25% of the fund value (this is different for final salary schemes). You might use this to pay off a mortgage or loan, or save it to supplement income.
- An income which is liable to income tax to live on in retirement.
Final salary schemes will have their own rules as to how your lump sum and income is calculated but with defined contribution or money purchase pension schemes, unrestricted retirement benefits can be taken any time from age 55 (this will change to 57 in 2028).
There are a series of options which can seem daunting at first look:
Leave your pension invested: You don’t have to start taking money from your pension when you reach the policy’s ‘selected retirement age’. If you want to, you can delay taking your pension and leave your money invested until you need it.
Scheme Pension: This offers a secure lifetime income payable to the member of the scheme.
Guaranteed Income via a Lifetime Annuity: – You can buy a guaranteed income that can increase or decrease and is guaranteed to pay you an income for the rest of your life.
Adjustable Income and Taking Tax Free Cash in “Chunks”: Your pension is invested to give you a regular income. You decide how much to take out and when. You can take smaller sums of money from your pension and can chose to take your 25% tax-free amount as an initial payment or over time.
Drawdown Pension – Income can be taken direct from the pension fund as follows:
- Flexi-Access Drawdown – Allows you to take any income amount chosen
- Short Term Annuity – An amount can be used to buy an income for a term of up to 5 years
Uncrystallised Pension Fund Lump Sum (UFPLS) – Allows a single or a series of lump sums to be withdrawn, 25% of which is tax free.
Taking your whole pension in one go: Under the UFPLS option you could also chose to take all of your pension in one go – 25% is tax free, the rest is taxable.
Mix your options: If you have substantial pension funds or multiple arrangements you may be able to take a combination of the above options.
Some of the options allow you to change as your circumstances change, others are fixed for life so taking financial advice at the time is vital.
You can get advice about your pension arrangements by speaking to a financial adviser who is authorised and regulated by the Financial Conduct Authority (FCA). If you do not already have a financial adviser, you can click here for guidance from the FCA on finding a suitable adviser.
