How much money do I need to retire?
Before taking cash out of your pension, stop and calculate how much money you actually need. Do you need a lump sum of cash all at once? What are the tax implications of that? Maybe you’d be better off with a regular income stream?
Hopefully, retirement will be 30 - 40 years. Maybe even more. The money in your pension pot has to cover whatever you have planned for the golden years. Whether that’s more time spent with the grandkids, or the bi-annual seaside holidays you dream about on the daily commute.
What are the tax implications?
Taking cash out of your pension can have tax implications if you withdraw more than your tax-free element. This is typically 25% of your pension. You can leave the rest invested until you decide to make more withdrawals later down the line.
Understanding these implications before making any decisions is key. Noone likes a surprise tax bill. Just ask Nadim Zawahi.
What are the fees?
When you retire and start taking money out of your pension, you may be charged fees by your pension provider. Some providers will charge a fee per withdrawal. Others may charge a flat rate or percentage of your pension pot. And then there’s the administration fees.
What if I need more money later?
If you take cash out of your pension now, it may not be there when you need it later in life. Even if you continue to contribute to your pension, taking money from the pot may affect its ability to grow. Will you need more further down the line?
What are the risks?
Just in case we’ve not been clear enough. We’ll say it again. Taking cash out of your pension comes with risks. Whether that’s the risk of outliving your money or the possibility of your pension declining in value - you need to understand all potential outcomes.
Options for using your defined contribution pension in retirement
If you want to use your defined pension contribution in retirement, here are some of your options:
Keep your pension savings where they are.
Hold your horses. Take them later.
Use your pension pot to buy a guaranteed income.
Also known as a lifetime or fixed term annuity. This income is taxable, but you can choose to take up to 25% (maybe more, depending on your plan) of your pot as a one-off tax-free lump.
Use your pension pot to provide a flexible retirement income.
Otherwise known as a pension drawdown. You can take around 25% of the pot as a tax-free lump sum. The rest can be used to provide a regular taxable income.
Take a number of lump sums.
The first 25% of each lump sum withdrawal will usually be tax-free. The rest will be taxed as income.
Take your pension pot in one go.
Skip tax on the first 25% then pay tax on the rest, in one hit.
Mix and match.
Choose a combination of the above options. Use different parts of your pot or separate pots.
Good pension management is about understanding your options.
Pension management is a complex topic. Choosing what to do with your pension is one of the most important and impactful decisions you’ll ever make. At Oury Clark, we pride ourselves on giving accessible, straight talking advice that works for you. Cut the hassle and save time by chatting with a member of our team today.