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Turning your pension savings into an income for retirement

If you have a defined contribution pension scheme (also known as a money purchase pension), you’ll most likely need to decide how and when you’re going to turn those savings into an income when you retire. You can start withdrawing your pension savings from age 55 (rising to age 57 by 2028), but how will you know what to do?

Here are some options:

  1. Withdraw your pension savings as one lump sum or a series of lump sums. You can take your whole pension pot as one lump sum. The first 25% (usually up to a maximum of £268,275*) is tax-free, then you pay income tax on the rest. Or you can take a series of lump sums with the first 25% of each being tax-free (up to the maximum of £268,275). Taking more than 25% of your pension pot in this way is called an ‘uncrystallised funds pension lump sum’ and not all pension schemes allow it. If you do this, you’ll trigger the Money Purchase Annual Allowance. This means that if you decide to save into a defined contribution pension again, your annual allowance (the amount of money you can save into a pension each year) will reduce from £60,000 to £10,000. * You might be able to take more than £268,275 tax-free if you have protection from the Lifetime Allowance. You’ll have received a certificate from HMRC if you qualified for and applied for this. This figure is based on 2024 rules and is subject to change.

  2. Buy an annuity You can turn your pension savings into a guaranteed income for the rest of your life – otherwise known as an annuity. You’ll be paid regardless of what happens to investment markets. Things to consider: - You can choose to leave income or a lump sum to your spouse, partner or other financially dependent person when you die. Choosing this protection reduces the amount of income you’ll get each year, but it can be valuable. If you die before age 75, your beneficiary won’t pay any income tax on the income they receive. If you die after age 75, they’ll pay income tax at their normal rate. - If your beneficiary(s) received a lump sum from a value protection payment under an annuity, it would be tax-free if you died before age 75, up to your lump sum and death benefits allowance of £1,073,100. If the lump sum or part of the lump sum exceeded this limit, it would be taxed at the recipient’s marginal rate of tax. -The amount of income you receive will be fixed for life. You can choose to increase it each year (e.g. in line with inflation), but this can reduce the amount of income you start with. - You can take a 25% tax-free lump sum (usually up to a maximum of (£268,275) immediately before the annuity starts, but not once the annuity has started. - If you buy an annuity, you won’t trigger the Money Purchase Annual Allowance as described in point 1 above. So you can continue to save £60,000 a year into a pension.

  3. Move your savings into income drawdown With income drawdown, you can usually take any amount of income when you need it. Being able to manage your income in this way can be useful for tax reasons. You can also leave your savings invested, which could give them the chance to grow Things to consider: - When you die, the money left in your fund can be passed to your loved ones. If you die before age 75, your beneficiary won’t pay any income tax on the income they receive. If you die after age 75, they’ll pay income tax at their normal rate. - If the drawdown is paid to a beneficiary(s) as a drawdown pension fund lump sum death benefit, it would count towards your lump sum and death benefits allowance of £1,073,100, and the lump sum or any part of the lump sum that exceeded this limit would be taxed at your beneficiary’s marginal rate of tax. - Unlike an annuity, there are no guarantees. If your investments perform badly, or if you take too much income, you could run out of money. - You’re likely to pay ongoing fees and charges for the management of your investments. - You’ll trigger the Money Purchase Annual Allowance (see point 1 above).

  4. A combination of the above You can take a tax-free lump sum then buy an annuity to cover your basic spending needs. Then put the rest of your pension savings into drawdown and withdraw it when you need it. Some pension schemes don’t offer all these options so you may need to move your money to another pension scheme first to give you more flexibility. This might incur additional costs.

  5. Do nothing You can leave your pension savings where they are which means they won’t be subject to inheritance tax if you die. And if you die before age 75, usually your beneficiaries won’t pay income tax when they withdraw those savings.

Next steps You’ve got several options when it comes to finding out more or seeking help. We strongly recommend you take advice from an adviser authorised by the Financial Conduct Authority (FCA) before making any big decisions about your pension.

Author: Just – Taken from 2Plan Newsletter Edition 44 – 2024

The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.

Past performance is not a guide to future performance and should not be relied upon.

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen

The information contained in this newsletter is based on 2plan wealth management Ltd’s current understanding of tax laws as at April 2024. These laws are subject to change at any time and 2plan wealth management Ltd cannot be held responsible for any decisions made as a result of this newsletter. Tax advice is not regulated by the Financial Conduct Authority.

2plan wealth management Ltd is authorised and regulated by the Financial Conduct Authority. It is entered on the Financial Services Register ( under reference 461598. Registered Office: 3rd Floor, Bridgewater Place, Water Lane, Leeds, LS11 5BZ.

Telephone: 0113 302 1360. Registered in England and Wales: 05998270

© 2plan wealth management Ltd. All rights reserved.


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