Pension freedoms may bring more choice about how to spend retirement cash for those who understand their financial options.
But the risk is for those who are not clear about money matters, freedom also brings the risk of making costly mistakes.
Pension freedoms are counting to down to another anniversary since introduction in April 2015.
Since then, tens of thousands of pension savers have taken the opportunity to sort out their retirement finances.
If you are not sure about how to use your pension freedoms, here’s a short guide to the main points to think about.
What does pension freedom mean?
The measure gives retirement savers aged 55 and over the chance to take 25% of their pension tax-free and the rest as they wish – in a single lump sum, as a regular income or by taking money when they need to, or even a mix of all three.
Do all pensions qualify?
No. Pension freedoms are for direct contribution pensions, such as a personal pension, a SIPP or some workplace pensions. Final salary, state pensions and public service pensions are excluded because they are not funded in the same way.
Can I take all the money in my pension?
Yes. But don’t forget you will pay tax on 75% of the pot and if you have a large fund, this may push you into a higher tax bracket, so you should think about phasing the withdrawals to minimise the tax you pay.
I don’t want all the money, so what’s next?
You have several options and you can mix and match them –
- Keep the cash invested in a pension – Don’t draw it out and put it in the bank. You get less of an investment return and pay tax once you have withdrawn your 25% lump sum.
- Take the tax-free lump sum and stick the rest of the money in a flexible drawdown product. You pay less tax and can still take the money when you like
- Take the tax-free lump sum and buy an annuity that provides a guaranteed income for life
Who can give advice about what to do?
The government has set up the free Pension Wise service or you can consult an IFA. Pension wise can explain your options without telling you what to do, while an IFA will do both for a fee.
If you have a pension pot of more than £30,000, taking advice before taking the money is compulsory.