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10 frequently asked questions that will help you start to understand your pension choices

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10 frequently asked questions that will help you start to understand your pension choices

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4 minute read

Considering the rules and regulations that govern them, dealing with your pension can throw up many questions.

Understanding your pensions can help you to live the life you want when you retire. So, to help, here are answers to ten of the most common questions you ask us.

1. Should I consolidate my pensions?

If you’ve worked for several employers, or you’ve been self-employed, you may have multiple pensions. The ABI estimate that there are 1.6 million unclaimed pension pots, together worth more than £19 billion.

You might want to think about consolidating them into one pension. This could make it easier to keep track of your pensions and reduce the fees you pay on your investments. Conversely, consolidating could see you lose out on valuable benefits. So, it’s worth seeking advice first.

2. Should I take a tax-free lump sum?

When you retire, you can take a quarter of your pension as a tax-free lump sum. While that may seem appealing, you shouldn’t just take it because you can.

  • Do you need it? If so, what for?
  • Will taking a lump sum have an impact on your future income and lifestyle?
  • Would it be better to leave it invested?

Remember: if you take a lump sum, you don’t just lose the value of the withdrawal; you’ll also lose any gains this money would have made had you left it invested.

3. Should I transfer my final salary pension?

If you’ve been offered a significant lump sum to trade in your final salary (or defined benefit), you may be tempted to take it.

Remember that the figure might be high because it costs a lot to provide a guaranteed income for the rest of your life.

Your final salary pension may also include other benefits such as a spouse’s pension.

While there are sometimes reasons to consider a transfer, it’s a big step. Indeed, if your pot is worth more than £30,000, you will have to seek professional financial advice first.

4. How much can I take from my pension?

Your circumstances are unique, so this amount will be different for everyone. The key thing to consider is that you’ll have to manage your withdrawals so you don’t run out of money in the future.

Many experts believe that a sustainable withdrawal level is between 3% and 4% of the value of your fund each year. Again, this will depend on your own situation.

Drawing your pension also doesn’t mean taking a fixed amount each year. You may decide to take a smaller amount initially as you plan to keep working. Or you might want to draw more in the early years when you’re fit and healthy.

Again, working with a financial planner can help.

5. Should I buy an annuity or use drawdown?

Annuities have declined in popularity over recent years as more and more retirees choose to use drawdown.

While annuities may not be for everyone, they do something no other product can; they provide a guaranteed income for the rest of your life.

For many, the questions are: do you want to benefit from a guaranteed income? Are you prepared to keep your pension invested and develop a sustainable withdrawal strategy?

Of course, you don’t have to choose between an annuity and drawdown. You can combine the two to create a retirement income that works for you.

6. Can I take all my pension as a lump sum?

Yes, this has been possible since 2015, although you shouldn’t do this just because you can.

Any withdrawal above the tax-free amount will be added to your other income. It will then be taxed at your marginal rate. That could easily push you into a higher tax bracket, so you could lose 40% or 45% of your lump sum to tax.

If it is a small pot, then it might be worth considering taking it as a lump sum. The FCA report that, in 2019/20, nine out of ten pension pots fully withdrawn were for pot sizes less than £30,000.

7. Do I have to draw my pension at age 55?

No. You can choose to draw down the funds later if you wish.

If you have a workplace pension, you may have to obtain your employer’s permission, or the permission of the trustees, to retire early or late.

8. Will I pay tax on my pension?

Yes. Once you have drawn your tax-free cash, any withdrawal from your pension is treated as income and taxed accordingly.

If your total income, including all pensions and earnings, falls below the Personal Allowance (£12,500 in the 2020/21 tax year), you won’t pay any Income Tax.

Working with a financial planner can help you to make the most of your allowances and maximise your returns. For example, you may wish to draw income from taxable savings rather than from the tax-efficient wrapper of a pension.

9. How much State Pension will I get, and when?

In 2020/21, the new State Pension is £175.20 per week. To get this, you must have 35 years of qualifying National Insurance contributions and reach retirement after 6 April 2016.

You must have at least ten qualifying years of NICs to get any State Pension at all. If you have between ten and 35 years, you’ll get a proportion of the new State Pension.

You can claim the State Pension from the age of 66. This is scheduled to rise to 67 between 2026 and 2028. It could increase again to age 68 between 2037 and 2039.

10. Who will get my pension if I die?

This depends on whether you have a final salary or a private pension, and the age you die.

For example, if you have a defined contribution pension you have not yet drawn, and you die before the age of 75, the value of the pot will typically be paid to your beneficiaries tax-free.

Whatever type of pension you have, it’s important that you keep your death benefit nominations up to date. This helps the pension trustees pay benefits when you pass away.

Get in touch

If you have questions about your pension and your retirement, get in touch. Please visit our website or contact us at hello@capital.co.uk for more information.

Please note

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The value of your investments (and any income from them) can go down as well as up, which would have an impact on the level of pension benefits available.

Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances. Levels, bases of and reliefs from taxation may change in subsequent Finance Acts.

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