For the majority, from the age of 55 accessing your pension is an option. Should you be coming up to your 55th birthday, there may be a temptation to make a withdrawal, either as a one-off lump sum or as a source of regular income. However, this may result in a greater effect on your retirement lifestyle than anticipated if you draw from your pension at the first opportunity.
If turning 55 is still some years away, bear in mind that in 2028 the pension age will rise to 67. However, the same considerations will continue to be applicable.
The Financial Conduct Authority has reported that the percentage of savers accessing their pensions immediately they reach retirement age is rising. Between 2017/18 and 2018/19, we have seen an increase of 10% in the number of people doing this. A record number of 7,683 people aged 55 accessed their pension in the second quarter of 2019. Following the pension revamp in 2015, 7.5 billion of those aged 55 have made pension withdrawals.
From the age of 55, you have a number of options about accessing your pension. Once you reach the age of retirement there’s no requirement to touch your pension and your funds can be invested until they are needed. However, should you choose to access your money, your options are:
Annuity Purchase: Purchasing an Annuity is the only way to establish a guaranteed income for your lifetime if you have a Defined Contribution pension. This will pay-out a defined amount which may be inflation-linked.
Use Multi-access Draw-down: Your pension is invested with Flexi-Access Drawdown. This however enables you to retain control of the sum you choose to withdraw and when this is made.
Lump Sum Withdrawals: Lump sums can also be withdrawn from your pension whenever you choose and 25% of your pension can be taken tax-free. You have the option of taking a one-off lump sum when first accessing your pension or withdrawing amounts over a longer period of time.
Withdraw your pension in one sum: It’s possible to make a one-off withdrawal of your whole pension. However, for the majority of people this option is inappropriate as there can be significant tax rates.
Andy Knight is a Chartered Financial Planner at Pembroke Financial Services, providing pensions advice to clients throughout Sussex and the surrounding counties. Andy says “Just because you can access your pension, doesn’t mean you should. Here are three things to keep in mind before you decide.”
1. Considering longevity
The earlier your pension is accessed, the more it must be spread out to last during your lifetime.
Life expectancy has increased over the last decade. Should you be due to retire in 2020, you may well experience more years in retirement than generations have before you. The Office for National Statistics life expectancy calculator provides an indication of how many years you may need to rely on your pension to support you:
For a female aged 55, the average life expectancy is 87. There is however a one in four chance of reaching the age of 94.
For a male aged 55, the average life expectancy is 84 with a one in four chance of enjoying your 92nd birthday celebrations.
If you begin to withdraw from your pension at 55, there’s a strong possibility that your pension will have to provide an income for 30 years and in some cases in excess of 50. Although early access to your pension at 55 may open up more opportunities it’s important not to lose sight of longevity and how this will impact on your disposable income.
2. The impact of lump sum withdrawal
A lump sum withdrawal at the age of 55 which is tax-free can be very useful. You may want to clear outstanding debts, to be mortgage-free for instance, or to achieve ambitions you’ve planned for your retirement years.
Taking the tax-free lump sum doesn’t mean for many retirees that they will begin to make regular withdrawals from their pension. In reality, approximately 45% of people accessing their pension only the tax-free cash is withdrawn. Only two out of five start to draw an income straight away.
In can be very prudent to separate when the tax-free lump is taken from when funds are withdrawn as an income. Nevertheless, it’s essential to make careful calculations before proceeding.
There can be an impact on your future retirement income if you choose to withdraw a lump sum out of your pension when you reach the age of 55. These are funds that would otherwise hopefully be delivering returns through investment. The resulting impact can be more significant than you may have believed. Although for many the retirement income goal does prove to be achievable after taking a lump sum, to ensure peace of mind it’s always wide to check.
3. Reduced pension annual allowance
At the age of 55, you may still be planning to work for several years after first accessing your pension. You may also plan to continue contributing to a pension during this time. However, the Money Purchase Annual Allowance (MPAA) may limit how much you can add.
The MPAA will be triggered once your pension is accessed beyond the pension commencement lump sum. This will result in a reduction to the maximum you can contribute tax-efficiently to a pension to only £4,000 per tax year. Employer contributions and tax relief will also be covered by this limit.
Without planning for the MPAA, when you reach the time of retirement you may face difficulties in getting the value of your pension you had hoped for.
More effective control of your pension
Andy goes on to say “If you’ve taken a hands-off approach to saving for retirement, it’s time to take greater control of your savings. The introduction of Pension Freedoms in 2015 mean that retirees have far more responsibility for their income than previous generations. Being engaged with your pension and the decisions you’re making can help you make the most of your saving to build the retirement lifestyle you want.”
It can appear to be a daunting task to take control of your pension and the options available may be unclear.
Fortunately, you aren’t on your own with this. We’re here to ensure you are fully clued-up regarding any decisions you face for your retirement, including whether it would be beneficial to access your pension at 55.
Call us today on 01273 774855 or email us by clicking here to arrange a meeting with one of our fully qualified Independent Financial Advisers to fully explore your options.
A pension should be considered as a long-term investment. There may be fluctuation and this can fall, resulting in an impact on the level of the available pension benefits. The interest rates at the point you take your benefits could also affect your pension income.
The tax implications of pension withdrawals will relate to personal circumstance, tax legislation and regulation which are subject to future changes.