Ask the Expert: What’s the best pension option for me?
Our reader this week wants to know the best way to take her retirement income - all at once, as an annuity, or a mix of both? Carl Lamb of Almary Green responds.
I’m in my early 60s so am due to get my state pension from age 66. I have built up a private pension fund of about £120,000 and am wondering what might be the best way for me to take my retirement income. I understand I can take it all out of my pension at once and not buy an income for life but just invest it and live off the investments. Is that right?
Response from Carl Lamb of Almary Green
When you are getting close to retirement, it’s a really good idea to get advice about how you will manage your retirement income as the rules are quite complex these days. There are three main routes you could follow with your private pension fund.
Firstly, you could, if you so wish, take all the money out of the fund.
The most important thing to remember is that only 25% of it would be tax-free so you would be liable for income tax on the remaining 75% – which could well tip you into a higher tax bracket, leading to a pretty substantial tax bill.
It might also trigger a future inheritance tax bill as the funds would then be in your estate. We rarely advise this route, unless there are particular circumstances that make this suitable.
The second option is to enter into what is known as flexible drawdown. This allows you to draw sums from your private pension fund as and when needed to cover your requirements, leaving the rest of it invested.
It’s important to remember that keeping your money in a pension fund will mean that it will continue to be invested for potential growth – you don’t need to take the money out of its pension wrapper to do this and it can be more tax-efficient too.
When in drawdown, 25 % of your fund can be withdrawn free of tax and anything after that will be assessed for income tax.
The final main option is to use your pension savings to buy an income for life – an annuity.
This is still suitable for some people, although it can be less flexible and rates haven’t been great recently. Rates do vary between providers: you don’t have to go to the one where you’ve built up your pension savings so it’s important to shop around if you choose the annuity route.
These are all long term options and you can mix and match between them, so getting advice now can be really helpful to make sure that you achieve the right balance of flexibility and security to meet your needs and objectives.