You can leave money in your pension pot and still take an income from it. Money that is left in your pension pot will remain invested, which may give your pension pot a chance to grow, but it could go down in value too. Usually a quarter of your pension pot can be taken tax-free. The limit for those without protection is a maximum of £268,275. Any other withdrawals will be taxed whether you take them as income or as lump sums. You may need to move to a new pension plan to do this.
If you choose a flexible income option, your pension savings will only last until all the money has been taken out, so it’s important to budget carefully. There’s no guarantee of the future value of your pension savings – they could continue to grow, and any further growth will be free of tax, but the value could also decrease.
You’ll need to make sure that you’re aware of all features that your pension policy offers. For example, if your pension has a Guaranteed Annuity Rate (GAR), it could give you a higher level of income from an annuity, where the market rate is lower than the guaranteed rate on your policy. You should check with your provider whether you have one and how it works. There may also be an early exit reduction fee or a market value reduction on your current policy, so your pension savings may reduce if you take your benefits before your selected retirement date.
You can continue to make contributions to your defined contribution pension scheme (also known as a money purchase scheme) up to your 75th birthday and get tax relief on the personal contributions that you make. A defined contribution pension scheme’s retirement value depends on how much is paid into it and how much its value has appreciated. The annual maximum amount of contributions that can be made to defined contribution pension schemes in a year that qualify for tax relief is £60,000 for most people. However, if you start to take money from a defined contribution pension pot, the amount that can be contributed to your defined contribution pensions in a year that will qualify for tax relief is limited to £10,000. This is known as the Money Purchase Annual Allowance (MPAA). You won’t normally trigger the MPAA if you take your tax–free cash lump sum and buy a lifetime annuity that provides a guaranteed income for life or you take your tax-free cash lump and select a flexible retirement income, but don’t take any income from it.
We strongly recommend that you seek financial advice or talk to Pension Wise, a Government service from MoneyHelper that offers free, impartial pensions guidance, before making any decision regarding your policy. You are required to obtain financial advice if your policy has a safeguarded benefit worth more than £30,000 and you are considering certain retirement options such as transferring your policy to another pension scheme to take a flexible retirement income or taking the policy as a cash lump sum. Your retirement pack will usually confirm if your policy has a form of safeguarded benefit, including detail of how and when this benefit will be applied. If you would like more information please contact our customer service team to find out how you can obtain help, guidance and advice.
It is also important that you shop around to find the best deal for you, as you would with any other purchase. Your pension provider may not offer the option you want or other providers may be able to offer you a better deal, so it is worth comparing what each provider can offer.
Pension Wise provides more information on shopping around.
