First of all, just so you don’t get your pensions confused, we’re talking here about ‘defined contribution’ pensions. If you get a ‘final salary’ pension, also called a ‘defined benefit’ pension, from your employer, that may have different rules.
How and when you can take money
You can start taking money from your pension savings once you turn 55 (this may rise in the future), and you can generally take 25% of this tax free.
Here are your main options for the rest:
- You can leave it invested and take lump sums as and when you need them, or set up regular payments (often known as drawdown or flexible income)
- You can use all or some to buy a regular and guaranteed income for life (known as an annuity)
- You can take out all of your money in one go, but if you do this, anything over your 25% tax-free sum will be taxed. This could push you into a higher rate tax bracket and mean you get back less than you expected
You can also pass on any remaining pension savings to your loved ones when you die.
If you’d like more information about your choices, visit the Pension Wise website.
This much greater freedom and flexibility is letting people reimagine how they’ll spend their later decades. A ‘flexi-retirement’ is starting to look really appealing. For example, you could reduce your working hours and take regular payments from your pension savings to top up your income until you start getting your State Pension.
You can find out more about when you’ll start getting your State Pension and how much here.
Sue Taylor, who works in the financial services industry, now has retirement firmly in her sight and she’s planning adventurous times ahead.
She says: “For me, the most exciting thing about the current pension freedoms is that I no longer have to buy an annuity, but can draw down sums from my pension pot as and when I need them.
“This will be particularly useful for meeting the cost of holidays, as I hope to visit a lot more countries when I retire.”
Pensions are getting interesting
For others, who were put off by the restrictiveness of the rules around pensions in the past, the freedoms make saving into a pension plan a much more interesting idea.
In our recent survey*, only half of those questioned said their pension plan felt like ‘their money’. But as people learn how much control they have over their pensions, they realise it really is their money and they can make the decisions about it.
Mark, who’s in his 40s, is an example of someone who had initially decided a pension plan wasn’t for him.
“I’ve been self-employed for a long time and some of the company pension scandals, plus the financial crisis, had put me off having a pension. I used my savings to buy a property, which I now let out. I suppose I was thinking that I would save up to buy another property, but I’ve been looking into pensions and I think they’re much more appealing than they used to be.”
For Mark, one major attraction is the fact that tax relief is added to his pension savings, so any money he saves into a pension plan will get an immediate boost.
Also, he adds: “Being able to access the money from the age of 55 means it won’t be locked away for too long now. The flexibility of being able to take lump sums when I might need them is very appealing. But also, I might use some of the money to buy an annuity. I’m fit and well and I’m hoping to live for longer than the national average, so the reassurance of not running out of money would be great.
“I’m definitely coming round to the idea that a pension is something I should have alongside property and savings. I think this will be a good way of spreading the risk and funding my future.”
The impact of the coronavirus crisis on pension savings
For many people in or approaching retirement age, the coronavirus crisis has been a very difficult period. They may have seen their pension savings fall in value as markets have tumbled, which in turn may have an impact on how much money they have to live on in retirement.
If you’re in this situation, take a look at Holly Mackay from Boring Money’s article Do I need to re-think retirement? and our recent article Taking money from your pension savings soon? What you need to know. These give tips and things to think about to help your pension savings last as long as you need them to in later life.
Overall, the pension freedom changes have been hailed as a success and, due to compulsory workplace pensions, many more people are saving for their futures. However, with more freedom and more options come more decisions and responsibilities.
The onus is now on people to get involved with their pension savings. It’s up to you to keep an eye on your pension pot, make sure it’s invested in a way that’s aligned to how you plan to use your money in the future and make sure that it stays on track for the future you want.
There are many tools and pension calculators that you can use to get a full understanding of where your pension savings are now and how to plan for your future. And if you have a Standard Life pension plan, you can review and manage your pension plan through online services or on the go through our app.
The Pension Wise and Pensions Advisory Service websites are also good sources of information about your choices at retirement and the State Pension. If you’re age 50 or over, you can book an appointment with Pension Wise to get specialist pension guidance either over the phone or face to face.
But we understand that tools, calculators and guidance aren’t enough for everyone, and you may want to get financial advice from a professional. If you don’t already have a financial adviser, you can find one local to you at unbiased.co.uk. There’s likely to be a cost for getting advice, but it could be worth it in the long run.
*Standard Life Financial Attitudes and Behaviour Survey, 2020.
The information in this article is based on our understanding in July 2020 and should not be regarded as financial advice. Laws and tax rules may change in the future, and your own circumstances and where you live in the UK will also have an impact on tax treatment. Please remember that the value of investments can go down as well as up and may be worth less than was paid in.
Standard Life accepts no responsibility for information in external websites. These are provided for information only.