Thanks to pension reforms, there are now more options for using your private pension pot. Since April 2015, some people over 55 have greater freedom in how they can access their pension pots.
The changes to private pensions affect those in a defined contribution pension scheme. This is one where you build up savings (your ‘pension pot’) throughout your employment to fund your retirement. With a defined contribution pension you build up a pot of money that you can then use to provide an income in retirement.
Unlike defined benefit schemes, which promise a specific income, the income you might get from a defined contribution scheme depends on factors including the amount you pay into the pension, the charges of the provider and the fund’s investment performance over the years.
If you have a defined contribution pension, you have more options for how to use the money according to what best suits your needs. The rules were changed to give people greater access to their pensions funds. You are no longer restricted to simply buying an annuity.
Some of the options available include leaving the pension pot untouched, purchasing an annuity, getting an adjustable income (Flexi Access Drawdown), taking cash in chunks (Uncrystallised Funds Pension Lump Sum), or a mixture of any of the options.
You can also withdraw all of the money in one lump sum but with this option and indeed all of the options come hard and very important decisions to be made by all individuals.
It’s important to seek advice before making any decisions as the options you choose could affect your income, overall retirement savings, your benefits entitlements and how much tax you pay.
Pensions are a long term investment. You may get back less than you put in. Pensions can be and are subject to tax and regulatory change therefore the tax treatment of pension benefits can and may change in the future.