Pension Withdrawal Basics
Before we dive into the joy of reaping the hard earned rewards of saving into your pension, let’s just clarify what type of pensions we’re talking about.
At Zippen, we’re all about Defined Contribution (DC) pension pots. A DC pot could be a workplace pension, a personal pension or a Self Invested Personal Pension (SIPP). These are the types of pensions that we’re focussing on.
We aren’t looking at the State Pension, or Defined Benefit (DB) Schemes / Final Salary Schemes.
What is pension withdrawal?
Pension withdrawal is exactly what it says on the tin, it’s taking money out of your pension. I’ve made it sound terribly simple and, in fairness, once it’s set up it can be, but it’s setting the withdrawals up in the right way, and at the right time for you, that is key.
First things first, let’s not confuse pension withdrawal with retiring from work. Nowadays, the way we retire has changed. We may phase out our working lives, reduce hours, or make a career change to something less stressful.
A mixture of “reduced hours income” and state pension may cover expenses and maybe even luxuries but the timing of pension withdrawal is largely dependent on need.
Pension Withdrawal essentially comes in two forms;
When a withdrawal is made as income, it’s similar to when we’re working, and this income is paid into your bank account at a predetermined frequency.
Capital is the money that you have saved up in your pension pot in your name.
In retirement, both the Income and Capital streams are intended to achieve income and lump sums for you to live. With the income stream coming in at regular intervals, it’s then possible to supplement this via the capital saved.
What To Consider When It Comes To Pension Withdrawals
In a separate article we’ve thought about how much we need to retire. For the purposes of this article, we’re thinking about the practicalities, rather than target incomes.Taking your money out of your pension pot (huge emphasis on “your” here; this money belongs to you), is up there with life’s big decisions. Once you access your pension, the rules around paying money back into it tax efficiently in the future change, and consideration must also be given to tax and the effect on any other benefits that may be payable (ie Universal Credit). We’re big fans of the security of financial advice here at Zippen, and the world of Pension Withdrawals is a time when advice is probably needed most.
The fundamentals of pension withdrawal are that:
- You may usually be able to take 25% of your pension pot as tax-free cash
- Any further withdrawals are treated, and taxed, as income.
- The income can be taken in the form of
- An annuity, which is a guaranteed income for life or,
- Flexibly as one or more lump sums, or take a flexible or regular income.
Our focus today isn’t on tax. The income element of your pension will be subject to tax and this is a huge consideration. The timing of the pension income stream with our work, state pension, benefits and other sources of income is super important, as is consideration of death benefits. However, let’s talk about death and taxes another day.
You can get a guaranteed income for life from your Pension Withdrawal
An annuity is a policy that you buy with your pension pot. In return, the annuity provides a guaranteed income for life, which can continue to a spouse if you were to die, in full or in part, if you choose. Usually, when choosing the annuity route, it is best practice to take the tax free cash in full.
You can take your pension pot as a number of lump sums
Taking the income flexibly allows you to keep your pension pot invested, and to choose how and when to then take withdrawals from it. The flexible route doesn’t provide the guarantees of the annuity route, but it does keep you in control of your pension pot. You can time withdrawals as life/tax/need requires, whilst still having the pot invested.
The flexible income route means that you don't have to take all the tax free cash in one go if you don't need to and it can stay invested until you’re ready. It’s also possible to take a combination of payments that are a mix of tax-free cash and taxable income - this is known as ‘Uncrystallised funds pensions lump sums' - quite the mouthful!
The flexible route sounds great, but the issue is how much you’re going to withdraw and how to time withdrawals so that they last a lifetime.
The upside of an annuity is the fact that the payments are guaranteed to last your lifetime. However, annuity rates are currently very low, which makes the income your pension pot generates disappointingly low.
Requesting your Pension withdrawal
Once the decision has been made about the manner in which you are going to take your pension, you’ll need to organise how to go about it. If you’ve got a number of small pension pots dotted around, this can be quite complicated, with the added headache that some pensions don’t actually allow pension withdrawal without having to switch the pot to a new product/provider.
Let’s assume you’ve organised your pots into one manageable place prior to needing to take any withdrawals. You could simply contact that one pension provider and ask to see your withdrawal options with them. They will guide you through the options with the figures that you require. This is quite a good exercise to carry out even if it’s not your intention to take a withdrawal imminently, as it will tell you if you’re on the right track.
If you choose the flexible withdrawal route, decisions will have to be made about the ongoing investment of the pension pot. You may choose to keep your investment strategy unchanged, or change the format to suit your retirement income goals.
How long will your withdrawal take?
Pension provider administration turnaround times vary enormously. Obviously if you have numerous pension pots the job will be that much trickier.
Every year you will receive an annual statement from your providers - it’s the thing we all stick in a drawer and ignore. Well, as the time to take pension withdrawals approaches, we invariably become a little more interested. The irony here of course is that if we’d taken a greater interest at a younger age, the figures we see could be higher! Once you reach age 55 (or 57 from 2028) the nature of the correspondence from your pension provider will change to consider how and when pension benefits may be taken. Keep tabs on this detail, it will help your planning.
When the decision is made as to how the withdrawal will be taken, we recommend giving your pension provider at least 8 weeks’ notice. This will allow them time to do their administration, make disinvestments and set up payments.
Looking after multiple pension pots is tricky at the best of times, let alone when crucial decisions need to be made about pension withdrawals. Having everything in one place makes the entire process, from paying into your pension, to taking out of it, far more straightforward. It’s easier than you think too, because Zippen do all the hard work for you. From pension tracing, to valuable benefits checks, Zippen offer simplified advice regarding consolidation to help you today, and ease the pension admin burden - Here’s how it works.