Good advice can be invaluable and when it comes to pensions, getting the right advice at the right stage in your life can make all the difference to the degree of comfort in which you spend your retirement. Fortunately the government has recognized this and since April this year it has been possible to withdraw £500 per (tax) year from pension pots (defined contribution or hybrid) without any tax liability as long as it is used for the purpose of paying for pension advice.
The right time to use this benefit?
As is so often the case, the right time to get any sort of financial advice, including pension advice, is the time which is right for you. In practice, we’d suggest that you might want to take advantage of this benefit when you have a difficult and/or important decision to make. If you happen to find yourself reaching the period just before retirement without having used this benefit, then you might want to check in with a financial advisor once a year before retiring.
Questions you could discuss with an advisor
Would it be best for me to access my pension pot as soon as I retire?
- These days “retirement” is a somewhat of a flexible concept. For some people it can mean giving up a full-time day job to go off and earn an income doing something else, at least for a while. If you have other income and can manage without your pension in the period immediately after retirement, you may wish to leave your pot to grow for a bit longer.
Would I be better to use an annuity or income drawdown (or a combination of both)?
- Even though the announcement of pensions freedoms, including the right to opt out of buying an annuity, was met with great excitement in the press, the reality is that for some people annuities may well still be the most appropriate way to ensure that they have a reliable and stable income in their retirement. On the other hand choosing an annuity when income drawdown can would have been more appropriate could wind up being a very expensive decision.
If I opt for an annuity, which annuity should I choose?
- The word “annuity” actually covers a broad range of options and if you go down this route, it’s hugely important to get the right one for your particular situation. This is a situation where getting the right advice can be hugely important.
Should I take a cash lump sum and if so how much and when?
- Upon retirement, you can choose to take up to 25% of your pension pot as a tax-free lump sum. You can withdraw more than this, but such withdrawals are liable for income tax at your marginal rate.
- Withdrawing the cash has the obvious benefit of giving you cash in hand, but it also has the obvious drawback of reducing the value of your remaining pension pot. Hence, each individual has to work out which takes priority in their situation. For example, if you still have debts to pay off, particularly high-interest debts, then it may be to your advantage to take out money to pay them off, or if you choose to go down the route of purchasing an annuity, you could use the 25% withdrawal as an investment budget so that you still have the opportunity to pursue the sort of returns which can be found in the stock market. If, however, you choose to go down the route of income drawdown, you may find that it is in your best interest to keep your pension pot as large as possible for as long as possible.