Pension freedom rules allowing people to keep their pot invested and draw on it as they choose have left many wondering what to do with their fund in retirement.
The changes that arrived in April 2015 mean that savers with defined contribution pensions no longer have their hands tied on what they can do.
Many were previously bound to buy an annuity with their pension pot, a product that provided them with an income for life but was restrictive and often considered poor value.
Those retiring now have the flexibility to decide how they put their retirement fund to work, with the choice of keeping it invested, buying an annuity, or taking cash
Now those retiring have the flexibility to decide how they put their retirement fund to work: they can choose to keep their pension invested and draw on it, take lump sums of cash out of it, or even withdraw the whole lot. They could also still buy an annuity.
Each option has its benefits and drawbacks and there are important tax elements to consider, as well as working out how to make your pension pot last your lifetime.
If you keep your pension invested through drawdown, you can withdraw up to 25 per cent as a tax-free lump sum and other withdrawals are taxed as income.
If you keep it invested and draw cash lump sums (officially known as uncrystallised funds pension lump sums) the first 25 per cent of each withdrawal is tax-free, but the rest is considered as income and added to your other income to decide your tax rate.
You can also still take a tax-free lump sum of up to 25 per cent of your pension’s value and buy an annuity, the income from which will be taxed.
It is also possible to combine some of these elements, perhaps buying an annuity with some of your pot and keeping the rest invested.
Deciding which option is right for you can be tricky. That’s why This is Money has teamed up with Fidelity International to offer readers the My Retirement Options tool, which can help you understand the different choices and which may suit you. Use the tool below.
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