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The State Pension age is the earliest age you can claim your State Pension. Your State Pension age depends on when you were born. The State Pension ages have been undergoing radical changes since April 2010. The changes will see the State pension age rise to 65 for women between 2010 and 2018, and then to 66, 67 and 68 for both men and women. There are plans to change State Pension ages further.
Lump Sum - From April 2015, over-55s now have the ability to withdraw their entire pension and invest in anything they wish to. Pension holders have always been given the freedom to withdraw a 25% tax-free lump sum from their pension, however new regulations mean savers can now withdraw the whole amount in a number of smaller lump sums with the first 25% of the pension pot available to withdraw tax-free.
However, this doesn’t mean you should withdraw your pension all at once. The most optimal way to withdraw your pension is slowly over time to reduce the amount of tax paid. For example, if you had a £100,000 pot and withdrew it all in one transaction, you would receive £25,000. The remaining £75,000 would then be liable for 40% tax - as much as £30,000.
If the person decides to take the pension instead in £25,000 lump sums each year for four years, then each year they will receive £7,500 tax-free and be liable for income tax only on the remaining £17,500.
Drawdown - A drawdown policy is where your pension is invested, but still provides the saver with both an income and a lump sum from the pension at any time. There is two options for a drawdown pension; capped drawdown and flexible drawdown. A capped drawdown is limited to how much you could draw from your pension pot whereas a flexible drawdown allows for complete freedom in when and how much is taken from the pension.
Annuities - An annuity is an insurance product that allows you to swap your pension savings for a guaranteed regular income that will last for the rest of your life. How much you get is determined by the rate the annuity provider offers. They are generally considered to be the ‘safest’ pension option because they guarantee income for the duration of your life in retirement. However, with the recent changes in the pension landscape, the financial freedom provided to people means that they can benefit from flexibility and diversity.
The changes in the pension landscape allowing for a lump-sum withdrawal has now opened up a number of alternative investment opportunities. One of the most popular new pension options is buy-to-let properties. Recent research has found that more and more people are turning to property investment.
If you have accumulated enough income to live on - either through continuing to work or previous investment savings - you could possibly delay accessing your pension to pot and continue to let it grow tax-free. If you want to build up your pension pot further you can continue to get tax relief on pension savings of up to £40,000 each year (tax year 2017-18) until age 75.
It’s very risky to try to boost your pension pot by investing in higher-growth investments in the run-up to retirement. If the investments fall in value, there might not be time for them to recover before you want to start drawing from your pot.
There is a top limit on the value of pension benefits that you can receive without paying tax. The lifetime allowance is £1 million for tax year 2017-18. Any amount above this is subject to a tax charge of 25% if paid as pension or 55% if paid as a lump sum.
You still have to pay Income Tax after you’ve retired. This applies to all your pension income, including the State Pension. Many people assume that their pension income – especially the State Pension - will be tax free, but that’s not the case. Some income, including your State Pension, is paid without any tax being taken off. But if tax is due, this will often be collected by taking money off any company pension payments or when you take money out of a workplace or personal pension.
A number of services have been unveiled by the government after the pension reform. These services offer comprehensive plans with impartial pension guidance to those of a retirement age. As well as Pension Wise, a dedicated Government-funded website, there are also plans in place to incorporate the Citizens’ Advice Bureau and the Pensions Advisory Service among a number of others.