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Receiving your UK pension

When the time arrives to start receiving your pension you will need to make a few decisions, firstly though you need to understand what sort of pension you have.

There are to main types of UK Pensions:

Defined Contribution Pension
The majority of pensions in the UK fall into this category. With this type you and or your employer have been contributing an amount every month, it can be a stakeholder pension, standard pension or self-invested personal pension (SIPP).

Final salary or defined benefit pension
These are pensions set up by employers where you get a percentage of your final salary when you retire, most of these types of pension have been fazed out.

How much you receive doesn’t depend on how much you have contributed over the years but on the amount of your final salary in your final year of employment plus how long you’ve worked for your employer.

How do I find out who my pension provider is, or find their details?

If you have had a number of pensions over the years possibly with various employers, then it can be difficult to keep track of who your various pension providers are.

If the company that you worked for still exists, you could try calling the Human Resources department if it has one.

Alternatively, you can contact the Pension Tracing Service on 0345 600 2537 or visit www.gov.uk/find-lost-pension. This database has over 200,000 workplace and personal pension schemes.

What are your options regarding your pension

You can take the first 25% as a tax-free lump sum, although depending on the route you take it may mean you don’t get the whole amount in one go.

There are 5 main options as to how to take the other 75% of your money.

Option 1. Keep the cash in your pension
This is the default position until you are ready to take your money. By leaving your money in the pension pot you usually get a wide range of investment choices and can contribute up to £40,000 each year (or the amount you earn if that’s less). Once you start taking your pension, you can only contribute £10,000 a year.

This is an option for anyone who doesn’t need their pension income yet. You can take your pension from age 55, but most people will be working longer than that and will need that money for later in life.

Option 2. Withdraw all the money in one go
You can take the money out of your pension all at once. The first 25% is tax-free and the remaining 75% is taxed as income tax, which could be costly. This is because most people can earn currently £12,500 income without paying tax (known as the personal allowance), then you pay 20% tax on everything up to £50,000 and 40% tax up to £150,000 and anything over £150,000 you will pay 45%.

So this option maybe suitable for anyone who has a pension po of around £30,000 and want access to the money all at once, maybe to pay off existing debts that are costing them a lot of money.

Option 3. Take lump sums, leaving the rest invested in your pension until you need it
You can take cash when you need it, leaving the rest in your current pension. When you do take cash though, rather than taking the tax-free lump sum and then after that everything is taxed, when you take money, a quarter of each amount is deemed to be tax- free, the rest is taxed as income.

For example, you take £10,000 out of a £100,000 pension, £2,500 of it is tax-free, and £7,500 is taxed as income.

This option maybe suitable for anyone who doesn’t need access to a large chunk of their pension money all at once and wants complete flexibility over how and when they access their money.

Option 4. Take the tax-free cash then the rest in a drawdown product

You take the whole 25% as a tax-free lump sum straight away and then with the remainder of the cash you buy an income drawdown product which is an investment that pays you income, but also continues to allow you to withdraw lump sums if you need it.

This option maybe suitable for anyone who wants to access some cash, need income and flexibility to take capital when they want.

One big difference between option 3 and 4 is the way the tax is treated. Taking the tax-free cash all in one lump and putting the rest into a drawdown product could be a useful if you’re likely to earn less income as you get older, therefore be in a lower-tax bracket.

Option 5. Take the tax-free cash then buy an annuity
You can purchase an annuity which will pay you an income each year for the rest of your life until you die. So for example, if you’ve converted £100,000 into a standard annuity, you’ll get a regular payments of around £5,000 a year. Though there are lots of options such as linking it to inflation, or getting a higher pay out because of your health.

While annuities have been given bad press due to low rates, the great advantage is that you get a payment each year as long as you live so there is real security. It will likely give you less than a drawdown product, but it can’t ‘run out’ if you live a long time. So it is a valid option possibly for some of your cash.

The problem though is if you die early, with some annuities your inheritors get nothing. Then rate you can obtain vary significantly so ensure you look around, don’t go for the one offered by your current provider without looking at what other providers are offering. Look for ‘enhanced’ annuities if you’ve had health issues.

Tax implications
The main differences between the options is how you are taxed.

Option 3

Every time you take money 25% of it is tax-free, the rest is taxed as income.

Option 4 

You take 25% tax-free, then pay tax on the rest like income whenever you take it. Remember though you may drop down a tax band when they get older because your overall income is lower.

So if you are currently a higher-rate 40% taxpayer, but in a few years you will move to the basic 20% rate. For example if you have £100,000 in your pension and want to take £30,000 after tax now and whatever is left in 10 years’ time.

Option 3
To take out £30,000, you’ll actually need to withdraw £42,850. This is because only a quarter of what you get is tax-free (£10,710), the remaining £19,290 is after 40% tax is taken off. Here’s the maths:

• Take out £42,850.
 A quarter is tax free = £10,710.
• 
You pay 40% tax on the remaining £32,140 leaving you with £19,290. 

• So you get £10,710 plus £19,290 = £30,000.

• And you’re left with £57,150 in your pension.
• 
If the £57,150 grows at 5% a year on average, in 10 years you’ll have £97,730.
• Then when you withdraw that later, once you’re a basic 20% rate taxpayer, you get the first 25% tax free = £24,430.
• 
You pay 20% tax on the remaining £73,300 leaving you with £58,640.

• So you get £24,430 plus £58,640 = £83,070.

• Therefore in total you’ll have received £30,000 plus £83,070 = £113,070.

Option 4
To take out £30,000, you’ll actually need to withdraw £33,300. This is because you can only take a quarter of the £100,000 pot tax-free. Anything you take out above that is taxed at your 40% rate. Here’s the maths:

• Take out £33,330
 A quarter of your total pot (£100,000) is tax free = £25,000.

• You pay 40% tax on the rest of what you withdraw £8,330 leaving you with £5,000.
• So you get £25,000 plus £5,000 = £30,000.
• And you’re left with £66,670 in your pension.

• If the £66,670 grows at 5% a year on average, in 10 years you’ll have £114,030.
• Then when you withdraw that later, once you’re a basic 20% rate taxpayer.
• You will pay 20% on your £114,030 leaving you with £91,225. 

• Therefore in total you’ll have received £30,000 plus £91,225 = £121,225.

As you can see, if you’re likely to drop down a tax band as you get older, income drawdown has a more favourable tax treatment than taking cash from your pension as you need it.

What happens?

What’s tax-free?

Do I get an income?

What happens when I die?

Keep the cash in your pension

All money left in pension

n/a

n/a

Can pass on money tax-free to any beneficiaries – restrictions based on whether you die before or after age 75

Take lump sums leaving the rest invested in your pension until you need it

Access to all pension money as and when you need it

25% of what you take each time tax- free, remaining 75% taxed as income every time

You could use the cash you withdraw each time as an income

Can pass on money tax-free to any beneficiaries – restrictions based on whether you die before or after age 75

Take a lump sum out, the rest in a drawdown product

Take 25% tax-free lump sum, buy a drawdown product with the remaining 75%

25% tax-free, when you take money from drawdown it’s taxed as income

You can choose to drawdown money each month to provide you with an income

Can pass on money tax-free to any beneficiaries – restrictions based on whether you die before or after age 75

Buy an annuity

Take 25% tax-free lump sum, buy an annuity with the remaining 75%

25% tax-free, income you take from annuity taxed at your income tax rate

The point of an annuity is it gives you a guaranteed income for the remainder of your life

Typically the annuity dies with you, there are a few exceptions

Withdraw all the money in one go

Take 25% tax-free, then remaining 75% taken taxed as income

25% tax-free

No, you take the money all at once, you would have to be disciplined how you spend it to turn it into an income

If you take all the money out and spend it, then your beneficiaries will have nothing when you die, any money left will be passed on as part of the estate

You can combine the options
You can mix your options at different times after the age of 55.
For example, you can take some cash from your pot first and buy an annuity later. So for example if your pension pot was £100,000:
• You could take 25% as tax-free cash, which is £25,000.
• Use £20,000 to buy an annuity. This would give you a taxable income for the rest of your life of about £900 a year.
• Put the remaining £55,000 into a drawdown product and take the money the investments make as income.

You don’t have to decide to combine straight away
You may take your 25% tax-free lump sum if you want to pay off your mortgage, for example. You could put the rest into a drawdown product, but then if you decide that you want a more guaranteed income, you could buy an annuity later on in your retirement with your drawdown money.

If you live in the USA we can give advice by phone, email or Skype.

Contact us today for more information.

Schedule a free (no obligation) 30 minute consultation call at a time that suits you.

Book a FREE Consultation