How do I make the most of my pension?
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Matthew Hinchliffe is an Independent Financial Advisor with Smith & Pinching advising on flexi-access drawdown pension arrangements.
I am due to retire in a couple of years and am starting to work out what money we might need on a regular basis at that stage. I have a personal pension I’ve been building up over the years which is now worth about £350,000. I know that I am entitled to take a quarter of my pension pot as tax-free cash, but I won’t need a large amount at that stage so I think I’ll use all the fund to secure my income – but will I end up losing the tax advantage that way?
Matthew Hinchliffe of Smith & Pinching responds:
When you come to take retirement benefits from a personal pension, you do indeed normally have an entitlement to draw 25pc of the fund free of tax.
However, the treatment of your tax-free entitlement does differ depending on what type of arrangement you adopt to fund your retirement, using your pension savings.
In the old days, you would automatically have been looking at using your fund to purchase a guaranteed income for life – an annuity – so the decision about taking your tax-free cash had to be made at the outset. Annuities can still be suitable for some people, particularly those who are risk averse or have potentially life-shortening health conditions.
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However, pensions are much more flexible these days and you no longer have to go down the annuity route.
A common alternative is a flexi-access drawdown arrangement, which allows you to access your invested pension savings as and when you need it. Under this type of arrangement, you don’t have to take a tax-free sum all in one go, but you will retain the right to it as you draw down from the fund.
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It’s really important to understand how drawdown works: your pension savings are transferred to a drawdown plan where they are invested for potential growth. You take money directly out of the plan as you draw on it.
This does mean that you need to be sure that your fund can sustain you throughout your retirement, so I strongly recommend that you get ongoing independent advice about your income levels and pension investments both now, in the lead-up to your retirement, and throughout your retired years.
Another benefit of a flexi-access arrangement is that you can vary the amount of income you draw over the course of your retirement, so you could, for example, take a higher income early in retirement when you are more active and reduce that level of income later on as you become less mobile.
Financial advisers use lifetime cashflow planning to help you assess what you can achieve under different investment conditions and using different income levels.
Any opinions expressed in this article do not constitute advice. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.