What you can do with your retirement pot depends on what sort of pension you have.
These are typically one of two types.
If you are saving into a defined benefit scheme, you will have limited choice as the fund is not subject to pension freedoms.
These are generally final salary pensions offered by private and public-sector employers or the government to civil servants.
Retirement income is a tax-free lump sum and regular index-linked income based on how long you worked for your employer and your salary during this time.
If you are saving into a defined contribution scheme, you have a much wider choice over how to take your pension.
A DC scheme can be offered by an employer or a personal pension, like a SIPP.
Pension freedom rules that allow retirement savers to take and spend money from their pensions how they like from the age of 55 apply to DC schemes.
Not all DC schemes allow pension freedom drawdown, so check with your provider to find out what your options are.
QROPS are DC pensions, but only those based in Malta currently follow the same pension freedoms as UK schemes.
As a DC pension member, once you reach 55 years old you have six choices about how you can take cash from your pensions – and to complicate matters, you can mix and match between the options.
Spending order is important in retirement and as most savers will pay tax on their pension incomes the first decision is if you really need to take any money.
You can usually take 25% of the fund tax-free. Any other money you take from your pension is added to your other income and taxed.
If you have other savings that allow tax-free drawdown, such as an ISA, then do not touch your pension and spend this first.
Then, the options are:
Leaving your pension invested
This allows you to benefit from continued fund growth until you need the money
Take a guaranteed income
You can buy an annuity – an insurance policy that guarantees an income for life
Take a regular income
Keep your savings invested but take a regular income until the fund runs out
Take money as you need it
Instead of a regular income, treat your pension as a cash machine and withdraw and spend as you wish. With this option, your 25% tax-free cash is not paid in one go, but as a quarter of each withdrawal.
Take all the money at once
Not considered a good choice as you will probably rank as a higher rate taxpayer and pay tax at 40% after taking the lump sum because the size of the fund jumps you up a tax bracket.
If you leave the money in the bank, inflation will reduce your spending power, while the fund stops growing because you have disinvested.
Mix and match your options
You can mix and match these options, so taking a regular income and topping up your cash from time to time with an extra withdrawal is not a problem.
Just watch out if you buy an annuity – once you have invested in an annuity you cannot change your mind and get the money back.
Generally, taking money from a pension to reinvest is not a sensible idea.
The receiving investment should offer a much higher rate of return to cover the costs of liquidating your fund, any exit charges and set-up costs.
You also run the risk of a rise or fall in price while you are switching funds.
If you do not factor these costs into your strategy, you could end up with an unexpected loss.
This depends on how you regard risk – which means are you ready to stake your money against an investment that might fail on the chance you could generate a higher return?
If you are 50 or over, less volatile investments are probably a better idea. You will earn less of a return but are less likely to lose huge amounts of cash that you do not have the time to replace before retirement.
Think carefully about paying debts with cash from a pension. Money taken from the pot now could leave you will less later as you lose any fund growth.
If you have debts, find out how this may affect your pension options before committing to take any money as your creditors may have a claim against the money you withdraw.
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