Is mixing my pension options right for me?
After decades of working and building your pension pot, you’ll want to make smart money decisions to support you through your later years. Choosing how you’ll take your pension isn’t an easy decision - there are pros and cons to all your options.
For example, you could take 25% of your pot as tax-free cash with the rest as taxable income. However, depending on the size of your pot, you may be pushed into a higher tax bracket and faced with a bigger bill. On top of that, you’ll need to make sure your savings lasts throughout your retirement. Not an easy feat when you don’t know how long you’ll live.
You’ll also need to think about the costs you’ll face during your later years. For example, the potential cost of care for yourself and your partner, or any provisions you wish to leave behind for your loved ones.
You could take cash lump sums throughout your retirement. This gives you the freedom of taking your savings when you need it the most, while the rest of your pot has a chance to grow as it remains invested.
On the downside, there’s no guarantee that your investments will perform well, you may lose some of your hard-earned cash, and you’ll trigger the Money Purchase Annual Allowance (MPAA). There’s also the possibility that you’ll run out of money if you don’t keep track of your withdrawals.
You could purchase an annuity. This gives you the security of a fixed and regular income, either for a set period of time or for the rest of your life. It takes away the responsibility of managing your own pension pot and you could get an enhanced annuity (with a greater income) if you suffer from ill-health.
Bear in mind that not all annuities let you pass money on to your loved ones when you die, and you can’t change your mind once they’re set up.
Finding a suitable pension option can be a minefield. If you aren’t sure which option is right for you, then you can mix your options to find something that suits your goals for retirement and beyond.
How can I mix my pension options?
You can mix and match these options by using parts of your pension pot in different ways. If you’ve collected multiple pension pots throughout your career, you can use a different pot for each option.
For example, you can use part of your pot to purchase an annuity, and dip into the remaining pot by taking one-off cash lump sums. This will give you the security of a regular income and the freedom of boosting your cashflow when you need it the most. You could also take an adjustable income from your pension pot with a flexi-access drawdown, giving you flexibility and control over your hard-earned savings.
If you decide you don’t want to take all your pension straight away, you can take one of your pots as cash and leave the other as it is. This will give you a pot of cash that you can use as you wish, while potentially growing the other as it stays invested in funds, giving you a nice boost to your funds when you choose to take it later in life.
You’ll need to bear in mind that not all pension providers offer all these options, so you’ll need to check with your provider what’s available to you. This isn’t always a straightforward process and deciding how you’ll take your pension isn’t something to take lightly, so it may be worth seeking professional advice from a Specialist Financial Adviser from Wesleyan Financial Services.
What should I consider when mixing my options?
This depends on which options you’re considering. If you only have one pension pot and you take it all in one go, you won’t be able to change your mind or consider other options, as you’ll have no savings left to collect.
If you decide to purchase an annuity, you won’t be able to change your mind later down the line, even if your circumstances change or you find a better deal. This is because annuities normally can’t be changed or cancelled once they’ve been set up.
You’ll also need to consider the tax implications of taking money from your pension pot. Regardless of which option you choose, you’re entitled to take up to a quarter of your pension pot tax-free. You can take this how you wish, either all at once with a cash lump sum, in several smaller cash sums, or through an annuity.
The remainder of your pot will be taxed as regular income, and you may be hit with emergency tax if you take more than the initial tax-free amount for the first time. If you do end up overpaying tax, you can claim this back directly from HMRC.
Tax is dependent on individual circumstances and can change in future.
Can I still make contributions to my pension pot?
If you still want to contribute to your pension pot after you start drawing from it, you’ll need to be aware of the MPAA. The MPAA (Money Purchase Annual Allowance) is how much you can contribute to your pension and still receive tax relief. From 2023/24, you’ll normally get tax relief on up to £60,000 of your contributions, but this threshold will go down to £10,000 if you take your money as:
- Ad-hoc lump sums or one lump sum of your whole pension pot
- Income from a flexi-access drawdown
- Income from an investment-linked or flexible annuity.
If you’re considering one or more of these options, this may impact how much you want to add to your pension pot, or if you still wish to contribute at all.
The MPAA only affects defined contribution pensions, not defined benefit pensions.
What are my other options?
If you decide you don't want to mix your options, you can always choose a single way to take your pension. We've put together a comparison table to give you an overview of the different ways you can take your pension:
|Annuities||Taking your whole pot as cash||Cash lump sums||Drawdown|
|Provides a regular income?|
|Provides a secure income for life?|
|Allows you to change your income?|
|Is your remaining pot still invested?|
|Affected by the stock market?|
|Can it provide an income for a dependant?|
|Can I take my pension from age 55?|
This table is an illustration of your possible pension options. The options available to you will depend on your individual circumstances, including the type of pension you have.