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Summary

5 Best Options To Use Your DC Pension Pot

Whether you want to retire completely, progressively reduce your hours, or continue working for longer, you have numerous options to choose from regarding when and how you take funds from your Defined Contribution pension pot. You may even decide when to stop contributing to it — to fit in with your retirement goals.

When determining which choice or combination would give you and your dependents a consistent and tax-efficient income during your retirement, there are several factors to consider. As a result, it’s essential to understand your options, as your choices now will affect your retirement income in the future.

You can combine any of the choices described below, utilising various sections of the same pension pot as well as separate or merged pots. However, even if your pension scheme or provider does provide every choice, you should take the time to find the most suitable option.

Leaving Your DC Pot Untouched

You might be able to postpone receiving your pension until later. Your pension fund may grow tax-free until you need it. When you start taking money out, this may possibly give you more income.

If you wish to increase the amount in your pension pot, you may continue to get tax deductions on:

  • Pension savings of up to £40,000 per year, or 
  • 100% of your earnings if you earn under £40,000 until you reach the age of 75.

This is referred to as the annual allowance. You may have a reduced allowance if you are a high earner or have already taken money from a DC pension pot.

Using Your Pot To Buy an Annuity

In retirement, an annuity offers you a steady stream of guaranteed income. You can purchase an annuity with either a portion or all your pension pot. It provides income for life or for a certain number of years.

If you want to use the fund from your pension pot to purchase an annuity, there is a chance for you to withdraw up to 25% of the amount as tax-free cash. The rest can then be used to purchase the annuity, with the income taxed as earnings.

Using Your DC Pension Pot To Provide Pension Drawdown

Pension drawdown, also known as flexi-access drawdown, is a method of withdrawing funds from your pension plan to live on in retirement. It might provide you with greater control and flexibility over how and when you get your pension funds.

Normally, you can withdraw up to 25% of the total as a tax-free lump sum. The rest is still invested, with the possibility for future development. You may then select whether you want a consistent income or whether you want to get payments as and when you need them. However, because the value of your investment pot might go down as well as up, the income is not guaranteed.

Withdraw Some Lump Sums From Your Pot

You can keep your money in your pension plan and withdraw lump sums as needed. You can do this until your money runs out or until you decide to choose another alternative. This is also known as the Uncrystallised Funds Pension Lump Sum (UFPLS) option. When you accept a lump sum of money, 25% of it is tax-free, and the rest of your fund will be taxed as earnings.

The rest of the pension pot is invested. This implies that the value of the fund and future withdrawals are not guaranteed. Maintaining the fund’s investment offers the possibility of growth, although investments might go up or down. There may be fees for each lump sum withdrawal, as well as limits on how many withdrawals you can take every year.

Withdraw the Entire Amount of Your DC Pension Pot as a Lump Sum

If you want to choose, you can close your pension pot and withdraw the entire sum at once. However, you should be aware that taking the whole amount in your pension pot would not provide you with a stable retirement income.

Normally, the first 25% of income is tax-free. The remaining amount will be taxed as income. Withdrawing your whole pot has a number of disadvantages. For example, it’s very probable that you’ll be hit with a huge tax bill. Furthermore, it will not provide you or your dependents with a consistent income throughout your retirement.

You might run out of money and have nothing to live on in retirement if you don’t plan carefully. So, if you are considering this, you should consult a pension specialist.

Which One Is the Best for You?

When deciding how to withdraw money from your pension, you are not required to select just one option. Combining your options might provide you with the flexibility to meet diverse needs at various periods during your retirement. For example, you might utilise one option at the start of your retirement, such as a flexible retirement income. You can also use another alternative, such as an annuity, to obtain a guaranteed income later on.

If you have a large pot, you may be able to split it to offer some guaranteed income while leaving some invested. If you have more than one pension fund, you may want to select different options for each one. You can also continue to save for a pension and receive tax deductions until the age of 75. Several providers offer products that combine two or more options.

When you understand your options, you may wish to consult with a financial expert who can advise you on which option is right for you. However, finding a great financial expert that fits your needs is not an easy thing. You need to find one that is experienced and well-regulated. 

Cameron James has a comprehensive cash flow management system. Our senior management team has a decade of experience serving expats and is committed to serving the requirements of expats for many decades to come.

As a financial advice expert, Cameron James is regulated by the FCA, SEC, FSC, and CySEC. We are also subject to EU MiFID II regulations. The Markets in Financial Instruments Directive – (MiFID II) is a European Union legislative framework designed to effectively regulate financial markets and improve investor protections and results. Get in touch with us through the button below for a free initial consultation.

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