Keeping your cash in your UK pension the most common option for those who are of an age when they can take their pension.
Because while you can take your pension from age 55, for many people that is too young because they will still be working – if you’re 55 but you’ve got another 15 years of working, why would you release the money too early?
Even after your income drops because you work less, you may not need the cash and may prefer to keep it invested.
By leaving your money in the pension pot you should have a large range of investment options depending on your pension provider. You can contribute the maximum amount each year – £40,000, whereas if you started taking some of the money, it would be only £10,000.
Remember, the older you are the less risk you should take with your investments so you may want to examine what funds you are in to check that you are not taking too high a risk for your age group.
When should I take my money?
It’s important to understand that there are several separate events that can affect when you take your pension money.
If you reach age 55 when you can legally start to take your pension, you don’t have to start taking it
If you reach state retirement age, you don’t have to start taking money from your personal pension
If you’re still working you can still take money out of your pension as long as you are over 55 – Even if you are not working and you are retired, you don’t have to take any pension money.
Be careful of getting penalised
Under the terms of many old pension policies, you are penalised if you don’t buy an annuity or income drawdown product on the date you originally selected as your pension age. Even if your plans have changed and you don’t need your pension now, your pension company can charge you for not taking it.
It’s not common but it may happen so check your policy carefully to see if such penalties apply, or call and ask your provider. If so, you might also want to see if you can move your pot to another firm that will let you continue to earn returns and have more flexibility, but be aware there maybe a charge to change provider.
What happens to my pension when I die?
If you die before taking any money out of your pension you will be able to pass on your pension tax-free to any beneficiaries. But there are a few caveats:
If you die before age 75
Your beneficiaries can take the whole pension fund as a lump sum. Dependants (but not other beneficiaries) can also choose to buy an annuity, in which case the income will be taxed.
If you die after age 75
Your beneficiaries have three options:
Take the whole fund as cash in one go: If they choose this, the pension fund will be subject to 45% tax.
Take a regular income: If they choose this through income drawdown or an annuity (option available only to dependants), the income will be subject to income tax at their income tax rate at the time.
Take periodical lump sums: If they choose this, the lump-sum payments will be treated as income, so subject to income tax at their income tax rate at the time.
In our next article we will discuss in more detail: Option 2: Take lump sums leaving the rest invested in your pension.