🎓 Pensions Academy Lesson 9
If you’ve saved or are saving into a workplace or personal pension – great work! This will provide you additional income at retirement on top of your State Pension. However, this also comes with more decisions on when and how you can touch the money inside your nest egg.
So when can you access your retirement savings and how do you actually withdraw a pension? We take a look at your options below. Just make sure you’re up to speed with the different types of pensions from Lesson 3 in this Academy series.
State pension 🏦
Most people can claim the State Pension from the government at retirement. It’s usually paid into your bank account every four weeks once you reach state pension age – currently 66 for men and women. However, it will increase to age 67 by 2028, and could be even higher in future.
To receive a State Pension from the government you need to have paid at least 10 years of National Insurance contributions to get any payout and 35 years to qualify for the full payout (£179.60 a week for 2021/22). If you don’t need your State Pension straight away, you can opt to defer it. Doing this won’t impact the total amount you’ll receive, in fact, it means you could get a higher weekly payment the longer you delay receiving it.
Personal pensions and workplace pensions 💼
If you have paid into a workplace or personal pension, you can access the money at age 55, increasing to 57 in 2028.
You may have heard about releasing or ‘unlocking’ your pension early, but watch out because this is often a scam! ⚠️ If you try and take your pension before age 55, you could get hit with a very big tax bill.
Let’s say you have reached 55 and are thinking about your options. If you don’t need the money, perhaps because you’re still working, you can leave your pension where it is and access it later. If you do want to get hold of your pension, you have a few choices, which we set out below. Keep in mind that you can take up to 25% of your pension tax-free, with the rest subject to income tax.
Personal and workplace pension withdrawal options
One way of accessing your workplace or personal pension is to purchase an insurance product called an annuity. Your annuity rate provides you with a guaranteed income for life, and peace of mind. It doesn’t matter how long you live, or how the stock markets perform, your annuity provider will keep paying out a pension income each year. Your annuity income depends on a number of factors like the size of your pension, your age, health and more. You can compare annuity rates from a range of annuity providers before choosing which one suits you best.
It’s important to know that if you die before the end of your annuity payout period, the insurer would pocket the rest of your pension. An annuity is also rather inflexible as you can’t vary the income to suit your lifestyle.
Drawdown involves keeping your pension invested and taking money out as you please. So, if you had some expenses at the start of retirement such as home improvements or a big holiday to celebrate finishing work, you could withdraw the first 25% of the pot as a tax-free lump sum. After that, you’ll have 75% of your total pension pot left invested with the option to take out money whenever you need it, or set up regular withdrawals, both subject to income tax.
The downside is that your pension could reduce in value if your investments perform poorly, and your savings could run out if you withdraw too much too quickly or live longer than expected.
Pension lump sums
This is similar to drawdown, but the difference is the tax treatment. The technical term has a not-so-pretty name of ‘uncrystallised funds pension lump sums’ (UFPLS). This just means that rather than taking out the full 25% tax-free part of your pension as a lump sum, each UFPLS involves 25% of each withdrawal being tax-free with the remaining 75% being subject to income tax. Like drawdown, you just take cash when you need it, with the rest staying invested. Do remember, your pension could reduce in value if your investments perform poorly, and your savings could run out if you withdraw too much too quickly or live longer than expected.
Taking your whole pension pot as cash
It can be tempting to stick your whole pension in your savings account. But wait! 🚨 You may have to pay a lot of tax for cashing in your whole fund.
If you don’t need all the money right now, it can be better to leave it in your pension so it has the opportunity to continue to grow, and withdraw the cash gradually to reduce the amount of tax you have to pay.
Mixing your pension withdrawal options
You don’t need to settle on one approach – you could mix and match your options. For example, if you have several pensions, you could buy an annuity with one and use drawdown on another. Or even with the same pension, you could start off with drawdown, and if you want to buy an annuity later in retirement, the choice is always there if your provider offers it.
Please note – If you have a final salary scheme, it’s a bit different. You typically take 25% as tax-free cash and then receive a guaranteed income for the rest of your life. The age at which you get these benefits is normally determined by the pension scheme.
🎓 We’re coming up to the final lesson in the Pensions Academy! Get to know the Moneybox Pension as we break down how it can help put you in control of your financial future.
As with all investing, the value of your pension can go up and down, and you may get back less than you invest. Payments you make into your pension won’t be accessible until the minimum pension age (currently 55 increasing to 57 in 2028). We do not currently offer drawdown products (for the Moneybox Pension).