You might have heard that you can now take out some of your pension once you hit 55. But is this a good idea? David Mount, Brookson Financial MD, can help you decide.

Since April 6th, 2015, those over 55 have had more freedom over what they do with their pension savings. While you could always take out up to 25 per cent of your pension fund at this age, now there are a range of other options you can take to improve your financial situation once the time comes to retire.

However, what is the best choice for you? As always, the answer will very much depend on your precise financial situation. There are some things everyone should think about when the time comes to consider taking a pension income.

What options are there?

Once you hit 55, your pension will become accessible to you and you can decide what to do with all the money you’ve saved up. A common option is to use it to buy an annuity. This is a type of insurance policy that pays you a fixed income, either for a set number of years or for the rest of your life.

The amount you get each year will vary depending on a number of factors, most notably the amount of money in your pension pot and how old you are when you purchase the annuity. You can also arrange for your income to increase each year, and for it to continue to pay out to somebody else after you pass away.

When you go for this choice, you also have the option to take out 25 per cent of your pension as cash, tax-free, using the remaining 75 per cent to purchase the annuity. However, if a lump sum is more to your liking, you can potentially withdraw even more money.

Technically speaking, you can withdraw your entire pension pot. However, only 25 per cent of it will be given to you tax-free. You will be charged income tax on the rest based on your overall earnings for the year. Your withdrawal is included in your earnings, which means you could end up losing a significant amount.

Another option is to withdraw smaller sums of cash from your pension pot until it runs out. You can decide how much to take out, and when to take it. If you choose this option, 25 per cent of each withdrawal will be tax-free and the rest will be taxed. The level of control you have over the withdrawals means you can often avoid high tax charges.

Finally, you can invest your pension pot in a drawdown scheme, once again having the facility to take out 25 per cent tax-free. This involves investing your money and paying yourself a regular income from it. This can be more flexible than an annuity, but usually comes with some investment risk.

Should you withdraw your pension pot?

For a lot of people, the option to withdraw their pension pot and use the money for whatever they choose can be very tempting. However, this will rarely be the best option for you.

For a start, you are opening yourself up to high levels of taxation that could lead to you losing a lot of your savings. There’s also the fact that you could end up denying yourself a regular income if you aren’t careful with the money, whereas an annuity or drawdown scheme will ensure you have money in future years.

We advise customers to be very careful about dipping into pension funds too early. Doing so severely restricts the amount that can be invested in future years. It also usually has a very detrimental impact on a client’s overall tax position.

If you’re approaching 55 and are thinking about taking out your pension money as cash, it is a bad idea to do so without at least taking some kind of financial advice first. At Brookson Financial, we can help you work out what the best options are for you, making sure you’re not left high and dry in your old age without an income to rely on.

This blog does not constitute financial advice and should not be taken as a recommendation to purchase or invest in any financial product. The value of a market investment can go down as well as up and you may not get back the full amount, particularly in the short term.  Before taking any decisions, we recommend that you seek advice from a qualified financial adviser or a lawyer is for information purposes only. This document is intended to provide information only and reflects Brookson Financial’s understanding of legislation at the time of writing. Brookson Financial is authorised and regulated by the Financial Conduct Authority. Legal and Taxation advice is not regulated by the Financial Conduct Authority.

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