When can I withdraw money from my pension?
If you have a personal pension, stakeholder pension or SIPP, you might be wondering about how and when you can withdraw money from it.
Well, under current rules (and these may change) you can access your money from when you’re 55. However you access your money, you can take 25% as a tax free lump sum. The reast will be taxed.
You used to have to buy an annuity with your pension money. An annuity is an agreement with an insurance company to pay you a certain amount every month or year, until you die. As of April 2015, you can also put your pension into ‘Drawdown’. This involves moving your pension into a drawdown account so you can withdraw what you need when you need it.
Purchasing an Annuity
If you want a guaranteed income for life, then purchasing an annuity may be the best option for you. An Annuity is an agreement with a company to pay you a set amount of income for the rest of your life.
However, with interest rates at an all time low, annuity rates are very low at the moment. Hargreaves Lansdown have a handy page on their website which show you the best annual income you can purchase for £100,000. Currently £100,000 will by a 65 year old a guaranteed stable income of £5,120 a year.
There are many different types of annuity, such as:
- Joint life annuities – this will continue to pay out as long as one of the lives insured are still alive. This is useful for couples, especially where one has worked less
- Guaranteed periods – annuities that guarantee to pay out for a certain amount of time, whether the holder dies in that time or not, which can guarantee at least some return on the annuity for your family, in the event of an early death.
- Fixed increase – annuities that increase every year by a fixed amount which can be used to combat inflation
- Index linked – annuities that increase every year inline with a particular index, such as inflation.
- ‘Enhanced’ or ‘Impaired Life’ annuities – if you have certain health problems that can lower your life expectancy, you can purchase an Enhanced annuity, which can pay more.
The income that you get from an annuity is taxed just like a normal wage.
Drawdown
If you’d like to retire but still have other savings or income to live on, then drawdown may be your best option. You can take what you want as and when you need it.
Once you reach 55, you can apply to your pension provider to move your money into drawdown. Just like the annuity option, you can receive 25% of your pension pot tax free.
A drawdown account is just another ‘wrapper’ – like a pension. Unlike a pension, however, you can’t put any more money into it, you can only take money out of it.
The catch is that you have to pay tax on this part of your money just like you would if you had earned it. If you’re not working you would still get your tax free allowance per year, and but if you are working you would be taxed on it all. This could be up to 45% for the top tax band, if you withdraw more than £150,000.
One of the oft touted advantages of George Osbournes ‘pension freedoms’ was the ability to withdraw your whole pension if you want to. But, as we’ve previously established, none of us like paying tax! When you’re ready to retire the object should be to take just as much as you need and no more, minimising your tax bill. This is why taking all the money out of your pension in one go might sound like a good idea but in reality may cost you in the long run.
Pension Liberation
You may have heard of ‘early release’ or ‘pension liberation’ schemes which allow you to access your pensions before the age of 55. They are all scams! They generally involve hefty fees, and involve transferring your pension overseas where you will have far less control over your money and no recourse should something go wrong. Plus, if the tax man finds out that you have tried to access you pension pot early, they will slap you with a punitive tax bill. The tax rate will be a minimum of 55% but could be as high as 70%.
The pensions advisory service has detail on these sort of schemes here.
There are also many schemes which now purport to allow you to access all of your pension once you are 55, which of course you are entitled to. Many of these though are just charging hefty fees for something you can do on your own. Many are also unregulated so you have no comeback should you lose money.
It’s certainly worth investigating any such deal, looking at the value what they are offering. It’s also worth double checking any tax obligations at might arise from taking your whole pension as tax, as unscrupulous companies may gloss over this part and you could be landed with a hefty tax bill.