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Planning your retirement? Pensions pot options explained

Retirement planning or pensions might seem complicated, but the basic idea is a simple one. Essentially, it is about working out how much to save now, so you can live how you want later.

Although the government will provide everyone who qualifies with a small state pension, at best this offers only the most basic income, so making your own arrangements is essential. Therefore, retirement planning should really begin as soon as you start work.

Research has indicated that more than half of the people in the UK either are not saving at all for their retirement or they are not saving enough to give them the standard of living they hope for when they retire.

Saving for retirement can be done through a workplace pension or a personal pension. However, there are other ways to save for retirement including ISA’s, other types of investment and even through property.

Peter Jarvis, chartered financial planner at Myers Asset Management outlines some of the options when planning what to do with your pension pot.

Advantages of saving into a pension

Pensions have a number of important advantages that will make your savings grow more rapidly. Therefore, a pension is essentially a long-term savings plan with tax relief. In addition, ‘automatic enrolment’ for employers into workplace pensions is now compulsory for all employers and will provide access to a pension that your employer will pay into, although there is the option to ‘opt out’.

The regular contributions made are invested throughout your career and then provide you with income in retirement.

When and how you retire?

Changes introduced in April 2015 now give you more choice and flexibility than ever before over how and when you can take money from your pension pot. It is important to take your time and understand your options, getting help and advice as what you decide at this point will affect your retirement income for the rest of your life.

Generally, you can have access to your pension pot from the age of 55, taking up to a quarter of the pot as a tax-free lump sum and then using the remainder of the pot as you see fit.

Options include:

  • Leave pot untouched – delay taking your pension until a later date allowing your pot to continue to grow tax free.
  • Buy a guaranteed income for life – after you have taken your tax-free 25 per cent lump sum, you can convert the remaining 75 per cent of your pot into a guaranteed income for life, called an annuity.
  • Use pot to provide flexible retirement income – 25 per cent of the pot or the amount you allocate to drawdown is tax free with the remainder being reinvested to provide you with a regular taxable income. Care needs to be taken as it is not a guaranteed income for life.
  • Take whole pot as cash – you could close your pension pot taking the whole amount as cash in one go. The first 25 per cent would be tax free, with the remainder taxable at your highest rate following adding it to the rest of your income. However, there are risks with this as you may be landed with a large tax bill and there will be no regular income.

These options can be combined to take cash and income at different times to suit your needs dependent upon various factors such as age, health, objective, and size of pension pot, although professional advice from a wealth management specialist would ensure getting the mix of these option right for your own individual circumstances.

For a bespoke tailored approach to managing your retirement planning and wealth protection contact Peter Jarvis at Myers Asset Management on 01782 557233 or email peter@asset-manager.co.uk.

The contents of this article are for the purposes of general awareness only.  They do not purport to constitute legal or professional advice.  The law may have changed since this article was published.   Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.