Decision time for additional pensions

Once you reach the age of 55 you are able to access any pension provisions you have that are not based on defined benefits (previously known as final salary or career average) whenever you want. You need to think very carefully about when to do so and what you do with these additional savings, as getting it wrong could prove costly. So what can you do with your additional pension?

Exchange it for an income for life

In other words buy an annuity. However, once you have done this you generally can’t change your mind and you no longer own your pension fund. Also, you need to think about whether the income you get will keep pace with inflation – while it may cover your expenditure now, can you be sure it will do so in 10 or even 20 years’ time? However, this might be an option to consider if you do not have a defined benefits pension that will cover your regular expenditure when you retire.

Take all the money out

Only the first 25% of the money you take out is tax-free and if you take out more you could end up paying a lot of income tax and possibly moving to a higher rate tax band. You need to plan carefully to minimise the tax implications when you take income or capital from your pension. And clearly, the more you take out, the less you have for future needs.

Leave all the money in

You could do this if you are lucky enough to have sufficient income from other sources, for instance a defined benefits pension, and you want to pass on your pension fund to your loved ones.

A combination of the three options above

You could use part of your fund to secure any additional income you need and then draw the rest as income or capital as and when you need it or want to treat yourself. This may suit you if you have a defined benefits pension that provides you with enough income to cover your regular expenditure.

The value of your investments can go down as well as up and you may get back less than you invested. A pension is a long-term investment and inflation will reduce how much your income is worth over the years. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.

Passing it on

You are now able to pass funds remaining in your additional pension when you die, irrespective of whether or not you have started taking your pension, to any beneficiary you nominate. Pension funds generally fall outside your estate for inheritance tax purposes. However, your beneficiaries may have to pay income tax on the funds they inherit.

If you die before turning 75, they won’t have to pay tax, providing that the money is paid to them within two years of your death.

If you die after turning 75, your beneficiaries will pay income tax at their highest marginal rate, unless the entire fund is withdrawn as a lump sum, in which case they will pay 45% tax (tax year 2017/18).

You therefore need to think about whether you should take income or lump sums from other assets before touching your pension, as this may be more tax-efficient. Also, pension funds are not taken in to account when calculating payment for long-term care.