There is now more choice than ever when it comes to taking an income from your retirement assets. There is no solution that works for everyone as it depends on your individual circumstances and income needs.
There is a lot to consider when it comes to accessing the assets, pensions, investments and savings that you have accumulated for you retirement. It is important that you understand the tax implications of taking income from different sources and consider ways that you can maintain your capital at retirement.
It is important that how you choose to take your income corresponds with your life goals and objectives.
How can I get income when I retire?
They are several ways to take an income in retirement and it is important that you understand all your options and the tax implications of each one. You have the flexibility to combine any of these options to suit your personal retirement plans. At Four Wealth Management, a financial adviser can advise which options are best suited to your individual circumstances and they can create a bespoke retirement plan for you.
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There are advantages to deferring retirement income if you can afford to do so. For example, if you do not need the state pension as soon as you are eligible to receive it, for every 9 weeks that you defer your state pension income will increase by about 1% or almost 5.8% if you defer for a year.
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Below is a short summary of your income options from your pension.
Drawdown
Drawdown is a way for you to take money directly from your pension as an income. This is usually from a personal or workplace pension. Once you have reached the age that you can access your pension (currently 55, rising to 57 from 2028), you can choose to move some or all of your pension into Drawdown. Once you have moved into Drawdown, your assets have become ‘crystallised’ which means you have accessed your benefits. You can take 25% of your pension as a tax-free lump sum. The remaining fund will be taxed at your marginal income tax rate.
Partial pension withdrawal (UFPLS)
You can withdraw lump sums directly from your pension. This is known as Uncrystallised Fund Pension Lump Sum (UFPLS).
Full pension withdrawal
You can withdraw the full value of your pension in one go if you choose to. You will still receive the 25% tax-free and the remainder will be taxed as income. If the value of your pension pot is significant, you could be pushed into a higher-tax bracket than you are normally in, meaning that you end up paying more tax than you would have to if you chose to stagger withdrawals.
However, HMRC could apply emergency tax which might reduce the amount that you receive significantly. You would then have to reclaim this tax back from HMRC.
You must be aware that withdrawing from your pension will reduce the size of your pension fund and the investment growth may not be enough to maintain the level you wish to withdraw. The level of income you take will need to be regularly reviewed.
The levels and bases of taxation and reliefs from taxation can change at any time and are dependent on individual circumstances.
Annuity
You can use some or all of your pension fund to buy an annuity which provides a guaranteed income that will be paid for the rest of your life.
You are able to pick some options such as passing on the payments to your spouse when you die. Annuities are not very flexible and options that you pick cannot be changed after you buy the annuity.
Your health status can also affect the rate of income that is paid to you, for example you may get an enhanced annuity if you have a serious medical conduction.
A benefit of an annuity is that the income is guaranteed which could be useful as you get older and your appetite to risk diminishes. You also do not need to worry about running out of income at retirement which is a risk with using Drawdown.
Be aware that annuity rates can change subtantially and rapidly, there is no guarantee that when you purchase an annuity, the rates will be favourable. This could mean that your pension may be less than you’d hoped for.
A bespoke retirement plan tailored to you
Your options at retirement are complex and the tax rules and regulations are constantly changing so it can be hard to navigate.
A financial adviser at Four Wealth Management will take the time to understand your individual circumstances and income requirements when you retire. They will then create a retirement plan tailored to you to determine how much income you will receive each month and what sources you should use for income.
