Pension freedoms came about in 2015, giving people more control over their pension savings. Can you take your pension early and still work?
What are the pension freedoms?
In April 2015, the tax rules were changed to give people greater access to their pensions.
Drawdown of pension income is taxed at marginal income tax rates rather than the previous rate of 55 percent for full withdrawals.
The tax-free lump sum continues to be available.
There are six available options, these includes:
- Leaving the pension pot untouched
- Purchasing an annuity
- Getting an adjustable income (Flexi Access Drawdown)
- Taking cash in chunks (Uncrystallised Funds Pension Lump Sum)
- Cashing in the whole pot in one go
- Mixing any of the options
Leave pot untouched
It is up to you when you take your money. You might reach the normal retirement date under your scheme or have been sent a pack from your pension provider. Neither factor requires you to take out your money immediately. If you do not take anything, make sure you check the investments and charges under the pension contract.
Purchasing an annuity
You can use part, or the whole, of your pension pot to buy an annuity. Typically, an annuity provides you with a regular and guaranteed income. There are many different types of annuities available.
The amount of annuity you get depends on how much you have in your pot, when you buy it, your age, your health and lifestyle, and the type of annuity.
It is a good idea to shop around for the best annuity deals as they vary and the company holding your pension funds may not offer the best deal.
Annuities, whilst easy, may not be the best option and the decision to purchase one should not be taken lightly. Generally, they are not flexible and once you buy one then that is it, there is no going back.
Getting an adjustable income
You could also opt for an adjustable income. You can take 25 per cent of your pot as a single, tax-free cash sum. The other 75 per cent stays invested to give a regular, taxable income. You can decide what income you take and when you take it. Not all providers offer this option and if you decide to transfer funds to a provider who does, you may be charged a fee for this. You probably need to be involved in choosing and managing your investments and you may be charged a fee for this arrangement.
Remember the value of your pot can go up or down, and good management of those funds is critical if you choose this option.
Taking cash in chunks
You could also take amounts of money from your pension pot until you have none left. You get to decide how much to take and when to take it.
Your 25 percent tax-free amount is not paid in one lump sum –you get it over time. Each time you take a chunk of money,25 per cent is tax free and the rest is taxable. This option is known as ‘Uncrystallised Funds Pension Lump Sum’(UFPLS).
Some pension providers charge a fee to take cash out. Not all providers offer this option or set minimum levels of withdrawals. If your current provider does not offer it, you can transfer your pot to another provider.
Cash in the whole pot
You can cash in the whole value of your pension pot in one go.
However, you need to think about things such as how much tax you will pay on the amount taken and what you will live on when you retire.
In particular, you need to be cautious if you decide to spend most, or all, of the money in one go, if you also claim certain benefits or require social care, now or in the future.
A mix of the options
You have the freedom to decide what to do with your pension pot after reaching 55 years of age, and you can mix a few of the options together.
For example, you could leave your pension pot to grow for a few years, withdraw 25 percent tax free as income, and use the remainder to purchase an annuity.
If you have multiple pots, you can use different options for each.
You could leave one pot untouched and take cash in chunks from another.
Can I take my pension early and still work?
There is no set retirement age, so you can carry on working for as long as you like. You can continue working while taking from your private pension. The income will be taxed at your marginal rate, which could higher if you have income from work and your pension.
When you can take money from your pension pot will depend on your pension scheme’s rules. However, you usually have to wait until you are at least 55 to take from your pension. Some companies will offer to help you take money from your pension before you are 55, but this could be an unauthorised payment which means you pay up to 55 percent tax on it.
You can also draw from your State Pension while continuing to work. You can start receiving your State Pension when you reach State Pension age, regardless of whether you decide to retire or not.
If you have any questions relating to pensions, get in touch with us today for a free consultation with a UK qualified adviser.