Different options for withdrawing your pension

There are a lot of different ways to access your pension, and they all have different pros and cons. Only you can decide what is right for your personal circumstances. You should consider taking financial advice before making this decision.

For informative purposes only, we have provided a simple explanation of the most common options. Please see below and let our team know if you have any questions at all.

This document is not a comprehensive guide to the different options and is not intended to give an all-encompassing picture of your options. There may be consequences or implications of these options that we do not mention below.

Option 1: Do nothing

It’s not a problem at all if at the moment you decide to do nothing. Your pension will stay exactly where it is.

Option 2: Transfer your pot to another pension provider

From any age, you always have the option to transfer out to another pension provider. If you let the other provider know you’d like to transfer, most of the time they’ll get in contact with us directly to request this.

Option 3: Taking your full pot

You are able to withdraw your full pension savings as a cash lump sum.

In technical pension terms, this is called:

  • Taking an Uncrystallised Funds Pension Lump Sum of the full amount in the pension pot (UFPLS)

Tax:

  • There could be tax implications depending on the size of the pension pot

  • Usually you’ll get the first 25% as a tax-free lump sum

  • But you’ll then need to pay tax on the remaining 75%, as it will count towards your annual income

  • It could also move you into a higher income tax bracket

  • Emergency tax may also be deducted from your payment, but you should be able to claim this back from HMRC

Annual Allowance:

  • This option will trigger the Money Purchase Annual Allowance if the amount in your pension pot is worth more than £10k

  • This means that the total amount you can pay into any pension pot each year from this point will be reduced from £40k to £4k

Option 4: Taking smaller lump sum payments

With this option, you can leave your money invested and withdraw it as cash lump sums as and when you wish.

The remainder of your pension pot is left invested and so it has the chance to grow, but there is also a risk that it could go down in value. If you choose this option, you may wish to spread your withdrawals over different tax years to minimise the tax you pay.

In technical pension terms, this is:

  • Taking Uncrystallised Funds Pension Lump Sums of a proportion of pension pot (UFPLS)

Tax:

  • The first 25% of each amount you take will usually be tax-free, but the rest may be taxed as income, depending on your circumstances

Annual Allowance:

  • Taking the first of these lump sums will trigger the Money Purchase Annual Allowance

  • This means that the total amount you can pay into any pension pot each year from this point will be reduced from £40k to £4k

Option 5: Taking your tax-free lump sum and the rest gradually

You can usually take up to 25% of your pension pot as tax-free cash and leave the rest invested to provide a regular income and occasional lump sums if required.

Your pension pot remains invested and has the chance to grow, but it could go down in value too. If you withdraw too much or your funds don’t perform as well as you’d expected, you could run out of money to fund your retirement.

In technical pension terms, this is:

  • Taking your 25% tax-free lump sum

  • Moving the rest into drawdown, leaving it invested but taking your money as and when you need

Tax:

  • All payments, apart from your initial tax-free cash lump sum, will be subject to income tax

  • You can change or stop the amount you’re taking at any time

Annual Allowance:

  • Taking the initial 25% tax-free lump sum won’t trigger the Money Purchase Annual Allowance, but this will be triggered as soon as you take any more of your pension through drawdown

  • This means that after you take the first drawdown amount, the total amount you can pay into any pension pot each year from this point will be reduced from £40k to £4k

Option 6: Buying an Annuity

This is commonly done after taking the tax-free lump sum. An annuity provides a guaranteed regular income which will pay out either for a fixed time or until you die. You can take up to 25% of your pension pot as tax-free cash and use the rest to buy the annuity.

An annuity can be purchased, the amount of which will be determined by the value of your Penfold pension and annuity rates available at the time. An annuity will provide you with a guaranteed amount of pension, either for a number of years or until your death. Generally speaking, annuity rates depend on interest rates, life expectancy and the type of pension benefits you are buying (e.g. an increasing or level pension and whether any guarantees or dependants’ benefits are included). If you are in poor health or have a lifestyle that could adversely affect your life expectancy (e.g. heavy smoker), then you may get an enhanced annuity rate.

In technical pension terms, this is:

  • Taking your 25% tax-free lump sum

  • Buying an annuity with the remaining 75%

Tax:

  • You won’t be taxed on the initial 25% tax-free lump sum

  • All income payments from an annuity will be subject to income tax

Annual Allowance:

  • Income received via an annuity does not trigger the Money Purchase Annual Allowance, unless you buy an investment-linked or flexible annuity where your income could go down

Option 7: Individual combination to meet your needs

You can choose to do a combination of the following methods of accessing your pension pot to meet your individual requirements and circumstances;

  • Taking your 25% tax-free lump sum

  • Taking Uncrystallised Funds Pension Lump Sums (UFPLS)

  • Draw a pension income directly from your Penfold Pension (often called drawdown)

  • Buying an Annuity

Please let us know if you would like to do that rather than one of the common options outlined above.



Are there any exceptions?

In certain circumstances, such as serious illness or accident, you will be able to access your pension early. If you were to pass away before you reach 55, your Penfold pension would be transferrable and available as a pension to a spouse, civil partner, dependent child or other individuals nominated by you. The pension can either be paid as an income or the fund can be used to buy an annuity for the individual you nominate.

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