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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. 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.
What are my other options?
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.