The pension freedoms are great but more choices can lead to more confusion for savers
So what can you do with your pension savings now? Here we go through your options. Our examples are based on a £40,000 pension pot. We highlight the pros and cons of each and offer a checklist to help you find the right option for you.
OPTION 1... CASH WHAT: Take your whole pot as a cash lump sum. THE FIGURES: Tax-free amount: £10,000 Balance: £30,000 Tax: £6,000 basic rate taxpayer, £12,000 higher rate taxpayer Total lump sum: £34,000 basic rate taxpayer/£28,000 higher rate taxpayer
PROS: Puts you in total control to use the cash as you wish. CONS: You could get slapped with a hefty tax bill on 75% of your pot. The bill will depend on how much other income you earn. Benefits such as pension credits could be affected and you might run out of cash in your old age.
CHECK:
Does your current pension scheme allow you to do this?
Be smart with your timing so you don’t end up paying too much tax. The charges? Does the pension offer guaranteed annuity rates? You are unlikely to be able to match them on the open market.
Think about what you will do with the money. Are you are going to save/ invest it, what are the returns and risks, and will you end up with another tax bill if you earn interest?
OPTION 2... ANNUITY WHAT: Turn your pension savings into a guaranteed income for life. THE FIGURES: Tax-free amount: £10,000 Balance: £30,000. Guaranteed yearly income around £1,500 Tax: Will depend on any other income.
PROS: Provides an income for as long as you live with no risk. You can choose options which guarantee your money back or will pay an income to a spouse or partner if you die first. You can pass income down generations tax-free if you die before age 75. CONS: Annuity rates are near historical lows, income is taxable and you can’t access the cash. If you die early, the insurance company keeps your money unless you buy a money-back annuity.
CHECK:
Don’t simply accept the annuity offer from your current provider. Compare the market as this can boost your income by 10%. For those with medical conditions, it can go up to 40%.
Pick the right type of annuity