For many of us, retirement is a time to focus more on leisurely pursuits and less on juggling income and outgoings. So how can you make the most of your pension so you can make the most of your retirement?

But while this stage of your life should be more relaxing, it’s still important to manage your money sensibly. That’s why seeking advice from a professional financial planner can give you peace of mind in your retirement. 

Retirement is a time to focus more on leisurely pursuits and less on juggling income and outgoings

Taking your pension

There’s been a lot of water under the bridge since ‘pension freedoms’ were introduced back in 2015, making it possible for retirees to access their pension from the age of 55 (57 from 2028). While it’s still possible to take all of your pension savings in one go, there are a number of other, arguably, more sensible options available to you: 

  • Take your entire pension pot in one go: As we said, this is still an option. 25% of your pot will be tax-free, while the remaining 75% will be taxed. It’s important to note that once you start taking the taxable amount from your pension it triggers the money purchase annual allowance, which effectively limits the amount of tax relief you can receive on any future pension contributions.  
  • Take out a lump sum: You could take out a proportion of your pension savings and leave the rest intact. With this option, you can take up to 25% of the pot without incurring any tax. But take anything over 25%, you’ll trigger the money purchase annual allowance.
  • Take tax-free chunks from your pension: Rather than take the 25% in one go, you could opt to take out smaller sums of money until the tax-free proportion runs out. 
  • Buy an annuity: You could withdraw 25% of your pension as a tax free lump sum, and use the remaining 75% to buy an annuity. This will give you a guaranteed income throughout your retirement.  
  • Pension drawdown: Alternatively, instead of buying an annuity, you could choose pension ‘drawdown’. This allows you to take a regular amount from your pension as income, while the remainder stays invested (and hopefully continues to grow). The risk here, compared to an annuity, is that your income isn’t guaranteed to last throughout your retirement, which means you could run out of money.
  • Leave your pension pot untouched: You don’t have to do anything with your pension pot when you reach retirement. In fact, it might be better from a tax perspective to use savings and other investments in the early years of retirement, and leave your pension alone until it’s needed. 
  • Mix and match your options: depending on your pension provider, you might be able to split your pension pot to leave some money invested while also purchasing an annuity. 

The priority is to have an income you can comfortably live on when you stop working 

Working out your income requirements

For most people approaching retirement, the priority is to have an income they can comfortably live on when they stop working. A pension is still the most attractive type of investment for this purpose in terms of tax efficiency, but it’s advisable to talk to a professional financial planner before making any decisions relating to your pension. This is especially important because making a withdrawal from your pension might have tax consequences that could leave you worse off in the long term.

As well as helping you to decide how to use your pension, a financial planner can help you to set an income target (after tax) that illustrates how much income you need each month. They can also help you to determine whether buying an annuity or arranging to drawdown your pension – or a blend of both – is the best option to suit your circumstances. 

If you need help planning your retirement, or managing your money in retirement, book an introductory appointment with one of our experts.

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To speak to one of our team, arrange an appointment or find out more, call 0800 915 0000, or alternatively use our contact form here.