What is Pension Withdrawal AKA Flexible Drawdown?
Pension withdrawal, pension drawdown, income drawdown, flexible drawdown or flexi access drawdown all have the same meaning. Basically, a flexible way of accessing your retirement savings as and when you want it and is the opposite of buying an income for life (or annuity).
Drawing lump sums and income will have tax implications so care is needed but if you really wanted to, you could even withdraw your entire pension on day 1!
How does it work?
Pension withdrawal allows you an alternative to buying an annuity, meaning you can withdraw your money in either lumps sums, monthly income or in any combination you want or need. Meanwhile, any money not drawn will remain invested, hopefully growing and thereby providing an even bigger pot to draw from in the future.
Below age 55, your pension savings cannot be withdrawn, when you reach the grand age of 55 the world of flexible drawdown becomes available. Where you draw your entire pot in one go, 25% is paid tax-free and the rest will be taxable as income.
If you die and have not managed to spend your pension, any money not drawn (and still in your pension) is available to your family or anyone of your choice, giving you peace of mind the fund does not die with you. Death before age 75 also means the benefits are paid completely tax-free including no inheritance tax!
There may be charges each time you take a withdrawal or a limit on how many withdrawals you can take. A lot of older pensions will actually not even let you draw flexibly and try to force you to buy an annuity instead! The big risk is that you spend it too soon an run out of money later in retirement. Given the complexity, it’s best to get expert qualified advice beforehand.
Cashing in Pensions at 55 – aka Pension Release
There are basically two routes to cashing in a pension. Up to 25% can usually be taken completely tax free with the remaining 75% subject to tax at your marginal rates.
If you take a large pension in one go, you could end up paying a horrific amount of tax! Whereas you could take your cash over 2 or 3 years and minimise the amount of tax you pay. Remember it is YOUR REAL money after all!
If you have a small pot, less than £30,000 it is usually a very straightforward process. this can be done via “small pot encashments” or “trivial commutation”. You should take care and get expert advice as cashing in a pension may trigger something called “The Money Purchase Annual Allowance”.
Can I cash in my Pension before 55?
In most cases, the earliest age you can access your pension fund is age 55 and be aware just because you can, definitely doesn’t mean you should!
Pension fraud and liberation scams are on the rise with schemes and so called “advisers” offering to release your pensions before the age of 55. You could end up losing all your pensions and should steer well clear!
Learn how it’s taxed and how it could effect your retirement
What are my options?
Cashing in your Pensions Options
- Cash in your pot in one go
- Tirivial Communtation
- Small Pot Encashment
- Choose an Annuity
- Leave the taxable income part invested
Pension Withdrawal Options
- Take 25 % tax free
- Take regular or ad hoc lumps sums
- Complete flexibility of withdrawals
- Leave remaining funds invested
- Income is paid taxable
- Mix & match!
Take 25% Tax-Free Cash
Pension Tax-Free Cash aka Pension Commencement Lump Sum (PCLS) means you can take up to 25 % of your pension savings as tax-free cash. The remaining 75% will be taxable when drawn as income.
You may take your cash as a lump sum or use a ‘phased approach’ and take your tax-free cash in chunks over a period of time. Some pensions may also have what’s called “protected tax-free cash” giving you more than 25% tax-free and therefore care should be taken before any transfer decisions are made.
You also need to decide what to do with the rest of your pension (ie: the taxable 75%). You could even cash this in one go (and pay a lot of tax) or leave it invested until a later time.
Options for taking your retirement benefits
It is important to remember your pension is provided as a source of income in retirement, so what you choose to do and how you choose to take it needs careful consideration. Taking too much, too early could leave you with not enough in the pot for your future.
Buying an Annuity – this can provide a guaranteed income.
Pension Drawdown (Flexible Withdrawal) – take your 25 % tax free cash and take the rest as and when you need it as taxable income.
Tax Free Lump Sum – 25% of each withdrawal can be tax free.
To understand about Pension Taxation on Tax Free Lump Sum and Income Drawdown click the button below:
To understand about how your annual allowance works when taking your tax free cash i.e Money Purchase Annual Allowance (MPAA) click the button Below:
What can I do with my Tax-Free Cash?
- Buy an Annuity
- Invest in a property
- Pay off your mortgage
- Repay debts
- Help kids with a deposit
- Holiday of a lifetime
- Build an emergency fund
Can I withdraw my money from my pension?
As long as you meet the minimum age (currently 55) then yes you can make either partial or full withdrawals from your pension, however just because you can does not mean you should! With a defined contribution (AKA money purchase plan), the faster you draw your money the quicker it will run out so you have less to use later on in retirement. With a final salary (AKA defined benefit) pension, any income will be dramatically reduced to take account of it being paid earlier than the schemes normal retirement age. There will also be tax implications on the withdrawal potentially costing you thousands of £’s. An expert adviser will do the research for you, pointing out any negative implications to make sure you make great decisions!
What age can I access my funds?
This is governed by UK legislation and currently the minimum age for pension withdrawal is from age 55. However in 2028, this will increase to 57 and could rise further in the future. Some older pensions also have what we call “protected retirement ages” and therefore could allow even earlier withdrawal, perhaps at age 50 for example. If you transfer a pension with an earlier protected retirement age you usually lose the protection and therefore care should be taken before. An expert adviser will check your plans and help you understand whether the benefits are worth giving up.
Can I cash in my pension to repay debts?
As long as you meet the minimum requirements (for example are at least age 55) then yes in theory you can draw your pension to pay debts or for any other use. However, your pensions are a “finite” amount of money so spending them too early and in one go means you will have nothing left for later in retirement. Don’t forget, there are tax implications too so depending on your circumstances means you could lose most of your plan to the tax-man aswell. An expert adviser will explain your options, perhaps help you draw just enough tax free cash to repay your debts and relieve any financial pressure!
What tax will I pay?
This depends on your personal circumstances and the calculations are vital to understand your position, however generally speaking with a defined contribution (money purchase) pension you can take up to 25% tax-free and the remaining 75% is taxable. You can draw your tax-free sum or the income as lump sums, regular income or in any combination making it reasonably easy to manage your tax liability. An expert adviser will not only complete the tax calculations but structure your withdrawals in the most effective way – for example minimising your tax liability by recommending you draw over multiple tax years. More on tax here (PUT LINK IN)
How long does it take to draw my pension?
This depends on your existing pension provider, the type of pension you have and whether it will actually allow you to draw your money flexibly (a lot of older pension plans will not allow this and therefore would need to be transferred first). Once it is ready to allow flexible drawdown, it then depends on the pension company in question but typically it could take 4-6 weeks to arrange a transfer if needed and perhaps 2 weeks to arrange and receive the withdrawal. An expert adviser will complete your requests as quickly as possible and as we look after millions of £’s, we can put extra pressure on your pension company to speed up the process.
Can I cash in my whole pension?
The simple answer is yes, however this does not mean you should! The tax liability on your withdrawal could be devastating! With small pensions (less than £10,000) you could use something called a “small pot encashment” or for pensions below £30,000 you could use “trivial commutation”. Whatever you are planning, an expert adviser will explain the best route to use for your circumstances and make sure you don’t pay too much tax maximising the amount paid to you.
Is it better to take pension income or a lump sum?
This very much depends on your circumstances and what you need or want. For example, if you are still working and have sufficient income but would like to repay your mortgage perhaps just enough lump sum using tax-free cash would be a good idea. If you are made redundant and have no income or mortgage then a decent monthly income may be needed. An expert adviser will get to know you in detail, help you understand your needs fully and recommend a personalised strategy just for you!
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