Options For Using Your Pension Pot

Thanks to the sweeping new pension reforms introduced in April 2015, you now have more flexibility than ever to access your pension pot.

Yes, you can choose from multiple options when it comes to accessing the funds in your pension and even choose a combination of options.

So if you are 55 years of age or have a protected retirement age and are legally entitled to your pension funds, then you now have complete control over how and when you choose to access your pension.

But irrespective of whether you plan to continue working, reduce the number of working hours or to retire fully, it is important that you plan wisely and choose the right option or combination that will give you and your dependants a stable income throughout your golden years.

Keep the Pension Pot Untouched

If you are one of the smart ones who started saving early for your retirement and has a supplementary source of income thanks to healthy investments, then you may choose to delay accessing your pension pot.

This applies to you even if you wish to continue working and have a stable monthly income at this point in time.

Delaying access to your pension pot has its advantages. Your Pot will continue to attract tax relief and will grow over time, providing you with a potentially higher income when you eventually access it.

You may need to review your investment choices though, especially if you are close to retiring. Moving the investments to safer investment choices is the expert recommended option.

Do check with your pension provider if there are any restrictions or charges if you delay your retirement date.

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Buy an Annuity

A quarter of your pension pot can be taken as a tax-free cash lump sum. The rest can be used to buy an annuity which will provide you with a monthly income for the rest of your life.

There are two different types of Annuities.

An annuity can also be used to set up a lifetime income for a dependent person or a beneficiary after your death.

Flexi-Access Drawdown

This is one of the newer ways of accessing your pension funds to create a monthly income.

Once again, you can choose to take an amount (25% or whatever you allocate for drawdown) of your pension pot as a tax-free cash lump sum and reinvest the rest of the amount into funds.

You can set your desired income level, and it can be altered or adjusted based on how well your investments perform.

Unlike an annuity, Flexi-Access Drawdown does not give you access to a lifetime guaranteed income. Also, your investments need to be managed with care.

From choosing a variety of investment options (Low and high risk) to using the remainder of the funds like a bank account and making periodic withdrawals, Flexi-access drawdown has its advantages.

Withdrawing Cash Sums when you need it

If you have an urgent requirement for cash, then you can make withdrawals from your pension pot. Apart from the first quarter which is tax-free, every withdrawal may incur charges and will be treated as taxable income.

There may also be limits to the number of withdrawals you can make each year.

Cash-in the entire pot 

The last option is to cash-in your entire pension pot which is considered to be an extremely risky option.

25% of the pot will be tax-free while the remainder will be taxed at your highest rate.

Here are some of the obvious risks of cashing out your entire pension pot.

  • No regular income for you or your dependant
  • Chances of incurring a huge tax bill
  • You may exhaust the entire cash pot
  • You will be left with no income during the later stages of your retirement

If you plan to cash-in your entire pension pot, then we recommend that you get professional financial advice before you do so.

If you still have questions in mind, you may look at our Complete Pensions FAQ.