Pensions - Articles - 77 percent not confident on how to access their pension

Nearly two fifths feel they should have sought advice or guidance before taking pension. Standard Life shares a guide to accessing your pension money.

 Confidence among UK adults around navigating how to access pension savings is staggeringly low, new research from Standard Life, part of Phoenix Group, shows.
 According to Standard Life’s Retirement Voice study1, conducted among 6,000 UK adults, less than a quarter (23%) feel confident about how they will access their retirement finances.
 The research also highlights that more information around options at retirement would help people make confident decisions, as nearly two fifths (37%) feel they should have sought advice or guidance before they accessed their pension savings.
 Dean Butler, Managing Director for Retail Direct at Standard Life said: “With less than 10% of people in the UK taking financial advice it’s unsurprising that very few feel confident about making decisions around accessing their pension savings, and many wish they had taken advice before they did so. It’s important that people are able to understand how their retirement finances work, and what their options are, so they can make informed decisions about what’s best for their futures. What’s right for one person’s circumstances might not be for another’s.
 “If you have a Defined Benefit (DB) pension, which usually offers a guaranteed income from your employer until you die, options tend to be fairly limited. This means less freedom in how you take your money but more reassurance that you can’t go far wrong. If you have a Defined Contribution (DC) pension, as most people actively saving now do, things are a bit more complicated. Generally, you have a few options – take all your money, take some of your money and leave the rest invested, while ‘drawing down’ monthly income from it, or using your pension money to buy an annuity, which provides a guaranteed income in retirement. It's also possible to take a ‘mix and match’ approach to your retirement income which could help you achieve the best of both worlds, if you annuitise a portion of your income to cover essential outgoings, and leave the rest in drawdown to access as and when you need it. With annuity rates sitting at around 6.6% for a healthy 65-year-old, it could be a good time to consider how a guaranteed income can fit within your wider retirement income mix.”
 Dean Butler shares tips on the basics when accessing your pension money
 1. Find out whether you have a Defined Benefit (DB) or Defined Contribution (DC) pension, and consider your options.
 If you have a Defined Contribution (DC) plan, either a personal one you’ve been paying into or a workplace one you and your employer have been contributing to each month, there are three main ways to take your savings:

 a. Take your money as a flexible income (drawdown), which means you can set up a regular income, decide how much money to take and choose when to take it. You can start, stop, or change the payments you get at any time

 b. Take your money as one or more lump sums, which means you can decide how much you take and when you take it.

 c. Use your money to buy a guaranteed income for life (an annuity), which can give you a guaranteed regular income for the rest of your life. You can choose an annuity that provides for others – like a partner or children – when you die.

 d. You could combine these options to suit your needs.

 You can usually take 25% of your pension pot tax-free. Check with your provider that your pension plan offers the options you want. If not, you may need to transfer to another provider. But transferring won’t be right for everyone. You also don’t have to take your money out as soon as you turn 55, you can leave it right where it is. You can use our retirement options tool to understand which option might suit you.

 If you have a Defined Benefit (DB) plan from an employer, you won’t get to choose drawdown or take lump sums as and when you please, unless you transfer into a DC scheme which is a complex decision and unlikely to be right for the vast majority of people. Instead, you’ll be paid an income for the rest of your life – usually on a monthly basis. The amount will normally go up in line with inflation, although some schemes apply a cap on increases. You might be able to take a tax-free lump sum, but doing this could reduce the total amount of money you get from your plan.

 2. How you take your money will impact the tax you pay
 After you’ve accessed the 25% that’s tax free, you’ll pay income tax on the remaining 75% of your pension pot. The amount of income tax you pay can depend on a few different things. For example, if you start taking money from your pension savings but still have income sources from elsewhere, you could find that you’re pushed into a higher tax bracket. This could be the case if, for instance, you’re still working part-time or are renting out a property.

 This can still happen even if your pension pot is your only source of income. Taking out a large amount in one go could also mean you pay higher tax on your withdrawals, compared to if you were to spread it out in smaller lump sums over the tax year.

 Let’s say you decide to take out £10,000 as a one-off payment. The government could assume that this is now your monthly income and deduct emergency tax from this payment – meaning you’d pay £2,952 in tax and would likely have to claim it back. But if you were to spread that £10,000 across 12 monthly withdrawals instead, you wouldn’t pay any tax as you’d be under your personal allowance for the year – which is £12,570 for the 23-24 tax year, and currently frozen until April 2028.

 Bear in mind that tax rules are different in Scotland. Laws and tax rules may change in the future. Your own circumstances and where you live in the UK will also have an impact on tax treatment.

 3. Your money could run out
 Unless you decide to buy a guaranteed income for life, your pension money could run out. We’re living longer these days, so it can be easy to underestimate how long you might need your pension money to last.

 If you take out too much in the early years, or if your investments don’t do what you expect them to, you could find yourself in a sticky situation.

 Your income needs are likely to change throughout your retirement. For example, if you pay off your mortgage, you’ll find you need less. But if you find you need to seek additional care later on in life, you might find you need more. So, when you’re making plans to take your pension money or if you’re thinking about adjusting your current retirement income, try to think about the long-term impact it could have and take financial advice if you need it.

 4. Taking money out can have a knock-on effect
 Once you start taking taxable income from your pot (anything over your tax-free entitlement), you could be impacted in other ways.

 Firstly, the amount you can pay into your pension plan while still getting tax benefits will reduce from £60,000 to £10,000 a year. So if your plan is to take money from your pension pot but continue working and paying in, you should keep this in mind.

 Next, taking money from your pension savings could impact your eligibility for any means-tested benefits, as it’ll count part of your income. It also could impact any debts you owe. Any business or person you owe money to can’t normally make a claim against your pension savings if you haven’t accessed them. But once you have, you might be expected to pay.

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