What will you do with your pension?

Taking the cash

Until the new rules came into force in April 2015, only those with very small pensions could cash them in. Now, from the age of 55 any saver with a defined contribution scheme can take the lot. You can do as you wish with your money, whether that means blowing it on a sports car, making an investment, purchasing a property or starting a business. However, the catch is that only the first 25% is paid tax-free. The remainder will be taxed at your marginal rate. The taxman will also consider your withdrawal as income for that year, which could bump you into a higher bracket

Still, it may make sense taking some (or all) of your pension if you have an urgent need for the money - debts to repay for example - or your pension is so small that it is not enough to generate a meaningful income. However, even in these instances if your withdrawal will move you into a higher tax bracket, it may make sense to phase your withdrawal across a number of tax years to reduce your bill.

Aside from the income tax you would need to pay in the short term, you also need to consider the tax benefits you give up when you take your money out of a pension - namely tax-free growth and protection from inheritance tax.

How to take cash out of your pension

Income drawdown

Lots of people want to have more control over their pension and invest their money, but you don't have to take your money out of its pension "wrapper" to do this. It's much more tax-efficient to move your money into income drawdown. Not only will you be spared a potentially huge income tax bill, you will also continue to enjoy tax-free growth on your savings and keep money out of your estate for inheritance tax (IHT) purposes.

Your existing pension provider may offer a drawdown service, or you can transfer your holdings into a more modern self-invested personal pension (Sipp). Once your money is in income drawdown you can take as much or little money out of your plan as you choose - this might mean taking a monthly income or only making withdrawals for ad hoc expenses if you have other sources of income.

But while you might love the idea of flexibility and control, income drawdown is not without risk. This is because your money remains invested and your income is not guaranteed - together these two factors mean there is a chance your savings won't last as long as you do.

You can run your investment portfolio yourself. However, the risks mean it's only recommended for those with experience of buying and selling investments as well as the time and commitment required to manage them. Less experienced or less enthusiastic investors may find it's worth paying for independent advice.

Is income drawdown right for you?

Buying an annuity

Annuities have long had a bad press. Pension providers have been accused of failing to let customers know they can shop around for a better deal, while increasing life expectancy and low interest rates mean the income they pay has plummeted.

Despite these problems, they offer something income drawdown cannot and that's guaranteed income. Even if it's less than you'd hoped - it will carry on being paid, however long you live. Shopping around and taking care to consider how any dependants will be looked after once you die will help you get a good deal. If you have any health problems (you don't necessarily have to be ill) or lifestyle issues (for example, you smoke or are overweight) you may also qualify for enhanced rates.

Lifetime annuities pay you a guaranteed income for life. You can purchase plans that pay a lower income initially but that increases in line with inflation but these are widely regarded as expensive and most people go for plans that pay a level income over the term.

Another option is investment-linked annuities. Here your money is invested and assuming stockmarket returns are in your favour your income should rise over the years. However, if returns aren't so good your income will fall. Minimum income guarantees prevent it falling below a set limit. That said, these risks mean they aren't usually recommended for people with smaller pots or those who cannot afford to see their income drop.

With any annuity, payments stop when you die and any remaining funds go back to the insurer. But it is possible to protect your money. If you are married or have a partner you can opt for a joint-life plan where payments continue for your other half. You can also guarantee payments for a fixed period (up to 30 years from 10 following the reforms). Alternatively, you can plump for value protection, which returns unspent capital.

These elements all provide peace of mind, particularly if you have family that is dependent on you. The catch, of course, is that they come at a price and reduce the level of income you receive.

How to buy the right annuity for you

Mix and match

You don't just need to select one option, nor do you need to rush into making a decision. Advisers are predicting many retirees will adopt a "mix and match" approach - using a variety of strategies to provide income and access to lump sums when required.

For example, you might use some of your pension to buy an annuity to ensure you have enough to cover your bills and then leave the rest invested to provide a financial cushion and protection from inflation. Alternatively, you might start off with money in drawdown and then purchase an annuity later on. The advantage of this strategy is that in buying your annuity later you'll get a higher income - especially if your health has deteriorated.

Likewise, if you can, it may be sensible to spend other savings first. While you will undoubtedly regard your pension as your retirement savings, the tax benefits are so good it may be worth leaving it untouched for as long as you can.

You can read the full version of this article in Issue 3 of How to Retire Style. In all leading newsagents from October 8th. You can order your copy today and get free P&P for just £4.99!

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Your Comments

Hi,i read your article about the changes to pensions but im afraid it was to much for me to know if it affects what i have which are a few annuities.Im 71 and when i reached 50 21 years ago i decided to cash in 25% and then receive monthly and quarterly payments for life.I contacted one of the annuities and was informed nothing was settled yet regarding cashing all of them in and that it wasnt mandatory that pension companies allow this to happen.So would appreciate some advice...will i have to just accept the monthly&quarterly payments and cannot cash them all in.Thanks Frank Keefe

Sent from my iPad

Hi Frank,

It sounds as though you you want to sell your annuity? If so, that's not possible until next year.

We'll run a story about this when we know more details, but for now you could try reading this: http://www.moneywise.co.uk/news/2015-12-15/sell-your-annuity-2017



Selling an annuity is going to be a very grey market indeed. And not as the chancellor promised us, the freedom do with our funds as we please, but instead we now learn that we must share this golden pot with the financial institutional leaches that are holding on to the billions and are wagging the the governments tail to allow them to hang on to a large chunk of the spoils.

As the present proposal stands, the early release of annuity funds will require the stake holder to sell the pot to a third party (another insurance company or regulated shyster), which will in reality amount to the loss of a third to a half the pot if we are lucky!. 

In giving the financial industry another massive bite of the cherry, just for for the privilege of cashing in our annuity deposits and by granting them further means and powers to illicit institutional usury with their unfair terms and huge fees and charges, that will inevitably heavily discount and discriminate against the elderly, the poor of health and those needy of their cash sum now, is a disgraceful and shameful deceit and a proper scam to what is tantamount to be legalised highway robbery to be sanctioned by this government.

If it is not a crony of the financial institutions, it is the duty of this and and any government to stand up for our right to claim every penny of our poorly managed funds and address this financial institutional gangster mentality issue with proper legislation in allowing each and every stakeholder to release their full annuity amount (lees a very modest admin fee and tax) to do as each person wishes to do with their annuity pot at any time.