Taking an Income at Retirement
Many people are put off personal pensions as they think they will have to buy an annuity at retirement age and will lose control of their investments. However there are a range of options at retirement age which can be incredibly tax efficient.
If all your pension income is likely to come from the NHS Pension Scheme then the options detailed below will not be applicable to you, but if you have capital in a personal pension then you really should consider the following.
One of the alternatives to buying an annuity is to invest at retirement age into what is known as Income Drawdown. In this environment your retirement savings can continue to be invested in stocks and shares, cash or even commercial property and you can take an income each year rather than buy an annuity. This facility can only be continued to age 75, at which time an annuity has to be bought or the money transferred into an Alternatively Secured Pension (ASP).
Typically you can take 25% of your pension fund as tax free cash or what is now known as a pension commencement lump sum, and the remainder of the fund can be used to provide a taxable income. Crucially the income that can be taken from a drawdown arrangement can be varied each year between a minimum of £0 and a maximum.
So if you are still earning post retirement you would have the ability to defer any income to a time when you are more likely to be a basic rate or non tax payer.
To make this even more tax efficient you can elect to take your income in the form of part tax free cash and part taxable income, known as phased drawdown. This is not only likely to reduce your income tax liability, it means your tax free lump sum is not invested in the bank being taxed, your death benefits are likely to be higher, and in the event of both you and your spouse dying prematurely, your inheritance tax bill is going to be lower and your beneficiaries will inherit more of your pension.
This almost sounds too good to be true, but it does not work for everyone. You really need to have a fairly large pension fund to cover the higher charges involved. This could be anything from £100,000 although some experts argue that the minimum should be closer to £250,000. The other disadvantage is you have to accept a degree of investment risk, so typically this solution tends to work for those with significant assets outside their pension.
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