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Insights Category: Retirement Planning

Taking Retirement Income: Tax in Retirement and Drawing Down

Introduction

There’s much greater flexibility when it comes to retirement incomes these days, but there are also a few traps waiting for the unwary.

It used to be that when you reached retirement, your journey as a pension investor effectively ended. That’s no longer the case, thanks to the 2015 reforms to Defined Contribution (DC) pensions, which have resulted in many people remaining invested during retirement. The process is now much more seamless, and in some cases very little really changes.

But some things do change, and it’s important to be aware of them. Perhaps the most obvious is the way in which you’re taxed once you begin to take an income in retirement. While there are more opportunities for tax-efficiency these days, there are also a few more pitfalls that need to be avoided.

What you need to know

A new tax regime

During your working life you generally didn’t have to think too much about which income would be taxed, because it would usually be your earnings. And you may well be aware that while you can still be charged Income Tax in retirement, you don’t pay National Insurance on investment income or on any earnings after hitting State Pension age.

But the tax situation is suddenly quite different in other ways too. From a tax perspective, you can now control much more about how you take your income and how much tax you pay. You could well have pensions, Cash ISAs, Stocks & Shares ISAs, property, earnings and so on. But how you extract money from that, and use it as income, is treated and taxed differently.

The best course of action won’t always be obvious. For many of those who are deciding where to take an income from once they’ve retired, the starting point will be their pension – but while the first quarter of your DC pension pot can be taken tax-free, people often forget that anything above that 25% will be taxed at your marginal rate. In other words, the way the pension is taxed makes it worth exploring other options.

For example, income from your ISA won’t be taxed, giving you flexibility to take your income from one place and not another, or to have a mix. A lot of people don’t necessarily realise this and they would rely heavily on a pension income that’s taxed, perhaps because they’re not aware of other ways of doing it. This is where an adviser can step in and help you, simply by knowing which levers to pull.

The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.

Steering clear of the traps

There’s one failsafe way to ensure you don’t end up paying more tax in retirement than you need to – get pension advice from someone who knows the costly mistakes to avoid.

When you’re approaching retirement, you should speak to an adviser to ensure you’re taking income in the most tax-efficient way, because it is quite different from how you’re taxed when you’re working. This applies to anyone leading up to and entering retirement. And it can be especially pertinent for those reaching retirement with both DC and Defined Benefit (DB, or final salary) pension pots.

That’s because the income from a DB pension will be paid to you whether you want it or not, and it will be taxed. So, it’s important to know which incomes you’re going to get anyway and which incomes you have more flexibility with.

An adviser can help you see the bigger picture and understand which of your assets are subject to which tax regime when you take money out. It’s a time of life when a lot of people want to take lump sums, and there are important decisions to make, so you don’t want to take your eye off the ball at the last minute.

Planning for your retirement can be overwhelming, but Apollo can help you begin the journey of budgeting for your later years. If you’re thinking of starting a pension or would like to review your existing pension plans, it’s a good idea to get advice.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation and reliefs from taxation can change at any time. Tax relief is generally dependent on individual circumstances.

You can also access free impartial pensions guidance from the Pension Wise website, or you can book an appointment over the telephone: 0800 011 397.

Should you require more information or have particular questions, we invite you to contact us at your convenience.

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LTA Removed: Restart Your Pension Contributions and Carry Forward up to £200,000

Introduction

In spring 2023, the government took pension savers by surprise, by announcing the removal of the Lifetime Allowance (LTA) Charge. In the 2023-24 tax year, the tax charge for exceeding the Lifetime Allowance threshold of £1,073,100 (or a higher threshold where LTA protection applies) was effectively removed, and the Lifetime Allowance itself was abolished from 6 April 2024.

The removal of the Lifetime Allowance is particularly welcome news for those whose pensions were already above the value of the LTA, and who were nearing a benefit crystallisation event – including turning 75 years old, drawing down funds, purchasing an annuity, or indeed upon their death.

Pensions are also regarded as a tax-efficient way to pass on wealth, as they are generally not considered to be part of a person’s estate for inheritance tax purposes. The removal of the LTA charge further enhances this benefit.

Many who stopped making contributions to their pension, will now be considering restarting contributions. If you’ve been a member of a qualifying pension scheme, but haven’t used your annual allowances for 2023/24 (£60,000), 2022/23 (£40,000) or 2021/22 (£40,000), then together with this year’s annual allowance of £60,000, you could kickstart your pension by carrying forward these allowances to make a one-off contribution of up to £200,000.

How has the removal of the LTA changed retirement planning and saving?

Removing the LTA is designed to keep people in work, and attract people back to the workforce

In the UK, employers are required to contribute to their employees’ pensions at a minimum rate of 3% of qualifying earnings, subject to that employee contributing at least 5% of their qualifying earnings. Over time, it’s a considerable benefit of being employed in the workforce. Previously, as workers’ pension savings had approached the LTA, they were becoming disincentivised to continue working. Now, employees may work longer, and those who had already retired may consider re-joining the workforce, which could lead to greater macroeconomic performance in the UK economy, and potentially lessen the burden on the state to subsidise people’s retirements.

It’s also designed to further incentivise savers, to maximise their pensions before turning to other investment vehicles

While it’s important to note that the Lifetime Allowance Charge might be reintroduced in the future, its removal coincided with the government raising the annual allowance from £40,000 to £60,000 (or 100% of your UK Relevant Earnings, whichever is lowest) with effect from the 2023-24 tax year. The purpose of the LTA had been to cap the tax privileges of pensions. Additional rate taxpayers qualify for income tax relief on pension contributions at up to 45%. If an additional rate taxpayer had opted to use their entire annual allowance at the previous level of £40,000, they would have attracted up to £18,000 in tax relief. With the increased annual allowance of £60,000, they could gain up to £27,000 in tax relief; an additional £9,000 a year. This may incentivise a greater amount of pension saving, subject to the limits on tax relief on pension contributions, before savers turn to other investment vehicles such as ISAs.

The tapered annual allowance may still punish ‘late savers’

Despite the removal of the LTA charge benefitting many savers, the complex tapered annual allowance (TAA) remains for those with threshold income in excess of £200,000 and adjusted income in excess of £260,000 who will see their annual allowance (the maximum they may save into their pension that tax year and still benefit from tax relief) taper down (to a minimum of £10,000) by £1, for every £2 their adjusted income exceeds £260,000.

It doesn’t leave out those who took out fixed lifetime allowance protection

In 2012, 2014 and 2016, some pension savers had the opportunity to take out fixed protection against the falling Lifetime Allowance. Each form of fixed protection allows the claimant to retain the level of Lifetime Allowance that was available immediately before the reduction (£1.8 million, £1.5 million and £1.25 million respectively). As a result, those claimants have not made pension contributions for several years in order to preserve their protection.

With the removal of the Lifetime Allowance Charge, claimants are likely to want to restart pension contributions. This would previously have automatically resulted in the fixed protection being lost and would have resulted in their maximum tax-free cash dropping to the current level of £268,275.

However, HMRC has since confirmed that, as long as fixed protection had been registered before 15 March 2023, the protections cannot be lost. They can therefore restart their contributions without renouncing their bigger tax-free lump sums.

What next?

If over the last few years, you had elected to cease making pension contributions, as the value of your pension crept above £1 million; then the removal of the Lifetime Allowance may represent a unique and valuable opportunity to significantly boost your retirement savings.

Assuming, as a member of a qualifying pension scheme, you have not used any of your annual allowances from the tax years 2021/22, 2022/23, 2023/24, and the current tax year 2024/25, you could make contributions amounting to up to £200,000 before 6 April 2025 – provided you are not subject to tapering in any of those years.

The net cost of each £1,000 contribution could be as little as £550.

That’s because you’ll receive automatic basic rate tax relief of 20%, and an additional rate taxpayer may claim a further 25% tax relief via their tax return.

And, because of the gradual loss of your personal allowance for income between £100,000 and £125,140 resulting in an effective 60% tax trap, you could gain even more if restoring your full personal allowance.

There are a number of factors that may cause different results in individual circumstances, which is why it’s important to seek professional advice from an expert adviser, to help you maximise the amount you can contribute to your pension and benefit from tax relief on this year.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time.

The value of any tax relief is dependent on individual circumstances.

Any tax relief over the basic rate is claimed via your annual tax return.

Should you require more information or have particular questions, we invite you to contact us at your convenience.

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Pensions: Explaining The Tapered Annual Allowance

Introduction

For those earning a high income, it’s essential to understand the implications of the Tapered Annual Allowance on making pension contributions. This guide offers an overview of the tapered annual allowance and its operational mechanism.

Understanding when the Annual Allowance is Tapered

Pension tapering regulates the amount high-earning individuals can contribute to their pensions annually while still receiving the full benefits of tax relief.

For the 2024/25 tax year, the standard annual allowance is set at £60,000. Nonetheless, those earning a higher income may see their allowance reduced to as low as £10,000, based on their total yearly income.

Individuals with a ‘threshold income’ over £200,000 and an ‘adjusted income’ over £260,000 are subject to the tapered annual allowance. The reduction in allowance halts when ‘adjusted income’ exceeds £360,000, setting the annual allowance to a minimal £10,000 for pension savings that receive the full benefit of tax relief.

Broadly, ‘Threshold Income’ includes all taxable income received in the tax year, including rental income, bonuses, dividend, and other taxable benefits.  From this you deduct any personal pension contributions to personal pension scheme.

‘Adjusted income’ includes all taxable income plus any employer pension contributions and most personal contributions to an occupational pension scheme.

Mechanics of the Tapered Annual Allowance

Individuals exceeding both a ‘threshold income’ of £200,000 and ‘adjusted income’ of £260,000 will experience a reduction in their annual allowance by £1 for every £2 exceeding £260,000 in adjusted income.

For instance, an ‘adjusted income’ of £280,000 reduces the annual allowance by £10,000, resulting in a £50,000 allowance instead of £60,000.

Tapered Annual Allowance and Carry Forward

The tapered annual allowance does not prohibit the use of carry forward rules, which permit the transfer of unused annual allowance from the previous three tax years. The tapered allowance for each year determines the amount that can be carried forward.

Employer Contributions and Exceeding the Tapered Annual Allowance

The tapered annual allowance applies to all pension contributions, including those made by employers. Exceeding your annual pension allowance incurs an annual allowance charge at your highest marginal income tax rate.

Calculating Your Tapered Annual Allowance

Determining your adjusted and threshold income can be complex. Additional information on calculating your tapered annual allowance is available on the Government’s website, and consulting an expert Adviser or tax specialist is advisable for tailored planning.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.

Should you require more information or have particular questions, we invite you to contact us at your convenience.

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Seven Steps To Retire In Your 50s

What does retirement look like to you?

Retirement often revolves around relishing life’s simple pleasures or embracing newfound financial freedom for spontaneous pursuits, fulfilling long-held dreams, and ambitions once sidelined by work commitments.

Are you eagerly anticipating retirement, feeling assured that your plans are well-managed? Or do you harbour unease, wondering if you’ve adequately prepared? Perhaps you aspire to retire early but question if it’s financially viable.

Achieving a comfortable retirement entails no shortcuts, despite prevalent misconceptions suggesting otherwise. It demands diligent planning and strategic decision-making.

Two-thirds of individuals in the UK aren’t saving enough to achieve an adequate retirement income.1 But how much is that? Research has shown that 77% of savers don’t know how much they’ll need in retirement.2

A £1 million pension pot might sound substantial, but it’s the pension sum many of us will require to sustain our current lifestyle throughout retirement. While it may initially appear daunting, attaining this goal is feasible with the adoption of prudent financial habits and comprehensive planning strategies.

1The People’s Pension – August 2022
2Pensions and Lifetime Savings Association (Based on research involving 249 participants) October 2023

At a glance

  • A couple may need in excess of £59,000 a year to live a ‘comfortable’ retirement, according to the Pensions and Lifetime Savings Association.
  • You could get tax relief of up to 45% on pension contributions, if you’re an additional rate taxpayer, meaning a £2,000 contribution has a net cost of just £1,100.*
  • For most people the Annual Allowance is £60,000, but this can be tapered to a lower level if you have a high income. However, personal contributions are also limited to 100% of your earnings in the tax year the contribution is paid.
  • Compounding has the potential to significantly improve the return on your investment, highlighting the importance of starting early.

*On the basis that any tax relief over the basic rate is claimed via your annual tax returna nd that you have invested the additional tax relief claimed.

What do you want in retirement, and how much will it cost?

Research for the Pensions and Lifetime Savings Association shows what kind of lifestyle you could have in retirement.

Source: Pensions and Lifetime Savings Association, March 2024

MinimumModerateComfortable
Single£14,400 a year£31,300 a year£43,100 a year
Couple£22,400 a year£43,100 a year£59,000 a year
Standard of livingCovers your needsMore financial security
and flexibility		More financial freedom
and some luxuries

Why save into a pension?

Savings vehicles like ISAs offer significant flexibility and are effective means to accumulate wealth for the future. However, pensions possess a distinct advantage: tax relief. Individuals under 75 can enjoy a 25% boost on their pension contributions from day one, as everyone receives 20% basic rate tax relief on their pension contributions from the government.

Moreover, higher or additional rate taxpayers may be eligible for additional tax relief through their annual tax returns. Additionally, any growth within a pension is exempt from Income Tax and Capital Gains Tax, providing further enhancement to your retirement fund.

It’s noteworthy that pensions aren’t generally considered part of your estate for Inheritance Tax (IHT) purposes. Consequently, saving into a pension helps circumvent the 40% IHT liability that would apply if the funds were held elsewhere. This consideration can significantly impact your future plans.

The value of an investment with St. James’s Place will be linked directly to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief generally depends on individual circumstances.

How much does each £2,000 contribution cost you?

Contributing £2,000 monthly into your pension could be more attainable than you realise, largely due to tax relief on your contributions. This estimate is predicated on the presumption that contributions are eligible and that any amount exceeding the basic rate of tax is reclaimed through your annual tax return and subsequently allocated to your pension.

How much can I pay into a pension?

For most individuals the tax benefits on pension contributions is typically limited to £60,000 per tax year. This include contributions from you, your employer, any third party as well as the tax relief added by the provider. The contributions you make are also limited to 100% of your earnings in the tax year they are paid.

Your Pension Annual Allowance may be tapered if you are a high earner – read more here.

Seven top tips for boosting your retirement fund

1. Start early

It’s undeniably tempting to prioritise immediate financial objectives and rewards, especially when retirement may seem distant.

You might find yourself thinking that you’ll start saving for the future “when I can afford to” or “when I’m earning more money.” However, adopting this mindset carries the risk of procrastination and potentially leaving it too late to adequately prepare for retirement.

The crux of attaining a comfortable retirement lies in saving as much as possible, as early as possible. By embracing this approach, you lay a solid foundation for securing your financial future and ensuring peace of mind during retirement.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

2. Maximise the use of your Pension Annual Allowance

For most people, contributions are limited to the £60,000 annual allowance. This includes any employer contributions and tax relief applied to your personal contributions. Tax relief on your personal contributions is also limited to the level of your relevant earnings in the tax year, or £3,600 if earnings are lower than this.

To capitalise on their annual pension allowance, an individual with a gross annual income of £200,000 could make a gross monthly pension contribution of up to £5,000.   As an additional rate taxpayer, the tax relief at 45% on these contributions amounts to £2,250 per month.  Their net contribution after allowing for the tax relief is therefore £2,750, equivalent of 16.5% of their gross earnings. This does not factor in any employer contributions that the individual might benefit from.

Starting at 35, investing £5,000 each month, the employee could expect their pension pot to be worth approx. £2,520,000 by the time they reach 55.

Please note that you can currently access your personal pension at 55 but this is increasing to 57 in 2028.

If they started at 45, the pot would be worth approx. £861,000 a decade later.

Based on £5,000 invested each month, increasing 2.5% a year: return 5% a year, compounded monthly, after charges. These figures are only examples and are not guaranteed – they are not minimum or maximum amounts. What you will get back depends on how your investment grows and on the tax treatment of the investment. You could get back more or less.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

3. Give your money time to work

Initiating saving sooner enables your money to remain invested for a longer duration, significantly enhancing the prospects of its growth. This phenomenon is propelled by the power of compound investing, where regularly investing money allows the returns generated to compound over time.

Compound investing serves as a potent tool, wherein the returns you earn have the potential to generate additional returns. Over time, this compounding effect can yield substantial gains, irrespective of the fluctuations in financial markets.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

4. Increase your contributions whenever you can

After initiating contributions to a pension plan, it’s essential to periodically assess and adjust your contribution levels. Simply allowing it to persist at a lower contribution rate may not align with your retirement objectives.

Whenever you receive a pay increase, contemplate raising your pension contribution by a corresponding percentage. Even a minor uptick can yield substantial benefits over the long term. Additionally, consider investing bonuses or inheritances as a strategic approach to inch closer to your savings target. Making larger, one-time payments can exert a meaningful influence on your retirement fund when invested over several years.

It’s also worth finding out if you have any unused annual allowance from previous years. Subject to certain limits this could enable you to pay in more than £60,000 in one year and still get the tax benefits on the whole amount. You can ‘carry forward’ unused allowances for up to three years. For instance, in the 2024/25 tax year you can use this year’s £60,000 annual allowance, then anything unused from 2023/24 (£60,000), then 2022/23 (£40,000) and finally from 2021/22 (£40,000), up to a theoretical maximum of £200,000 – provided you were a member of a pension scheme during each of those years, and made the relevant earnings.

The value of an investment with St. James’s Place will be linked directly to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

5. Don’t dip into your pension if you can help it

You can usually access your pension from age 55 (rising to 57 in 2028). This is when you can take up to 25% tax-free as a lump sum. Many people do, perhaps to pay off their mortgage or make a big-ticket purchase.

However, if feasible, it’s advisable to refrain from accessing your pension for as long as possible, allowing it ample time and potential to grow.

Keep in mind that a modern retirement might span 30 years or even longer. This prolonged duration underscores the significance of maintaining your standard of living throughout retirement, which is facilitated by maximising the growth potential of your pension fund.

6. Track down old pensions

You might accumulate several workplace pensions with different employers during your career. By the age of 45, UK adults have on average changed jobs 11 times.1

Keeping tabs on all your pensions can indeed pose a challenge, just as it can be difficult for your pension provider to stay updated on your whereabouts. For instance, many individuals forget to inform their providers when they change addresses. Three in five people don’t know where all their pension details are. One in four people has lost track of one or more of their pensions.2

It adds up to a lot of money. Pension pots worth nearly £37 billion are lost. That equates to over 1.6 million savers in the UK,3 a number that’s increased by 75% over the last four years. That’s money that could be helping people towards a more comfortable retirement. That could include you.

You’ve got a few options for tracking down forgotten pension pots:

Reach out to each former employer with the dates of your employment. They should be able to confirm the pension provider they contributed to for workplace pensions during that period. Ensure you have your National Insurance number handy.

Use the government’s free Pension Tracing Service, which can assist you in finding old employers. Once you obtain their contact information, contact them to request the name of your pension provider and policy number.

If you recall the name of your old pension provider, reach out to them directly. You’ll likely need to provide your name, address, and National Insurance number.

1, 2 Gretel – May 2024
3 Pensions Policy Institute, October 2022

7. Review your Pension Plans

Once you’ve gathered a comprehensive view of your pensions, it’s advisable to seek advice.

Understanding how your accumulated pensions will contribute to your desired retirement is crucial. Evaluate the performance of your investments – are they still suitable for your needs? Identify any restrictions or significant benefits you should be mindful of. It’s possible that adjustments may be necessary, particularly if a pension hasn’t been reviewed for an extended period.

You’ve dedicated considerable effort to earning your money. Taking the time to optimise your pension plans can ensure that all your assets are maximising their potential in preparation for your retirement.

The value of an investment with St. James’s Place will be linked directly to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

Book a no-obligation review

We’d be delighted to review your existing retirement plans, and wider financial circumstances, to help you approach retiring as soon as possible, in a tax-efficient way. Book a review with one of our experts today.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than you invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time, and are generally dependent on individual circumstances.

Should you require more information or have particular questions, we invite you to contact us at your convenience.

Contact Us

Avoiding The 60% Income Tax Trap

Introduction

It’s often thought that the highest UK tax rate is 45% – but that’s not the case.

If you earn more than £100,000 per year, you could be taxed at a rate of 60% on income between £100,000 and £125,140.

Here’s how it works

If you receive income of £100,000 or more, the rate of Income Tax you pay will be impacted by the gradual removal of the £12,570 Personal Allowance (the amount of income you can receive each year without paying Income Tax). The personal allowance is currently tapered away at a rate of £1 for every £2 of income above £100,000.

Once your income is over £125,140, you don’t benefit from any tax-free Personal Allowance whatsoever.

Here’s an example

Let’s say your salary has increased from £100,000 to £110,000. Here’s how the extra £10,000 would be taxed:

£4,000 – the standard 40% rate of Income Tax for a higher rate taxpayer
Plus £2,000 – the additional Income Tax as the personal allowance is reduced by £5,000

That’s a total Income Tax liability of £6,000 on your £10,000 pay rise – or 60%.

Considerations to mitigating this 60% effective tax rate

Make pension contributions

Contributing more to your pension before the end of the tax year is an efficient strategy to lower your taxable income and avoid exceeding the threshold. This approach offers dual benefits: it decreases your tax liability and enhances your retirement savings concurrently.

Consider this scenario: receiving a bonus or pay increase of £10,000 raises your taxable income to £110,000. By using this to make a £10,000 pension contribution you avoid falling into the 60% tax bracket and so both restore your personal allowance and obtain higher rate relief on the contribution.

It’s worth noting that there’s an annual limit on pension contributions that qualify for tax relief, which is typically the lower of £60,000 or your annual earnings. For higher earners, your pension annual allowance might be tapered down further.

What next?

If you would like to discuss how we can help you mitigate Income Tax liabilities, reach out to one of our experts who can discuss with you your individual requirements.

The levels and bases of taxation, and reliefs from taxation, can change at any time, and are generally dependent on individual circumstances.

The basic rate of tax relief of 20% is automatically applied to pension contributions. You must complete a Self Assessment tax return to claim additional rates of tax relief.

Should you require more information or have particular questions, we invite you to contact us at your convenience.

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Retirement Planning

Introduction

There are many options for planning your retirement, tax considerations, and pitfalls to avoid, all of which make it necessary to receive bespoke advice that caters to your lifestyle and the retirement you have planned.

Whatever you are planning for the future, we can help by calculating what you’ll need for retirement depending on the goals you have. We’ll ensure you understand how long your money will need to last to maintain the lifestyle you want, and how you can stay on track towards reaching your retirement goals.

Need a bespoke financial plan crafted specifically for your unique requirements?

Book a Demo

Components for consideration

Self-invested pension plans (SIPPs)

A Self-Invested Personal Pension (SIPP) represents a versatile pension scheme, granting access to a broader spectrum of investment opportunities compared to standard personal pensions.

A SIPP falls under the category of Defined Contribution (DC) pensions.

It’s important to note that SIPPs are not appropriate for everyone. They tend to have higher costs than a standard pension and are generally only suitable for individuals with a fair amount of experience in actively overseeing their investments.

Drawdown plans

Pension drawdown, or ‘flexible retirement income,’ is a method of receiving pension income upon retirement. Rather than deploying the entire sum in your pension fund to purchase an annuity, you opt to keep some of your money invested and withdraw a regular income directly from the fund. This gives the funds that remain invested the potential to increase in value.

You can take up to 25% of the pot as a tax-free lump sum, generally up to a maximum of £268,275. The remaining funds are moved into drawdown and any withdrawals will be subject to income tax in the tax year they are made.

You will need to decide how to invest the remaining 75% of your pension pot that you transition into drawdown. Selecting investment funds should align with your withdrawal plans and risk tolerance. It’s crucial to carefully consider your investment selections and the timing of your withdrawals. Keep in mind, the income from these investments is not assured since the value of investments can decrease as well as increase, and so the level of income you take will need to be reviewed regularly. Withdrawing too much money prematurely will reduce the size of your pension fund and the investment growth may not be sufficient to maintain the level of income you wish to draw. If you withdraw money at a rate greater than the growth achieved by your investments, your remaining fund will reduce in value.

It’s also possible to shift your pension pot into income drawdown incrementally. With each portion you transfer, you can take up to 25% as a tax-free sum, while the remainder goes into pension drawdown. This approach is often referred to as phased or partial drawdown.

Annuities

An annuity is a financial product that you can buy with some or all of your pension funds after you have taken your 25% tax-free cash. It offers a guaranteed income for the rest of your life.

You have the option to customise an annuity with various features, such as protection against inflation. Additionally, you can incorporate death benefits to allow the income to continue for a beneficiary after your death.

Your income rate from the annuity can change based on your health conditions. These are often referred to as enhanced or impaired life annuities, considering factors from your height and weight to your blood pressure and even serious health issues. The annuity provider evaluates your specific situation to offer a personalised income rate.

Annuities can provide a secure, guaranteed income which can be extremely valuable, potentially making them an important part of your overall income strategy, especially as you age or if your willingness and ability to take financial risks decrease.

As annuity rates can change substantially and rapidly, there is no guarantee that when you do purchase an annuity the rates will be favourable. This could mean that your pension thereafter may be less than you hoped for.

Nearing retirement

As you edge closer to retiring, the income you would normally receive from employment or your business may instead come from your pension pot(s).

The biggest worry for many people is running out of money when they decide to retire. So, how do you make your money last as long as you do?

There are several options to consider, including using your pension fund to purchase an annuity which can secure you an income for the rest of your life.

Another option is pension drawdown which allows you to take income from your retirement fund rather than buying an annuity, but due to the risks involved, you will need to take specialist advice.

The changes to pension freedoms that now allow people to have full access to defined contribution (DC) pensions from age 55, with unrestricted income is good news. These new rules remove most of the concerns people may have had in the past about inflexibility with pensions. You should carefully consider your options when thinking about retirement as it is an important decision to make.

You can also access free impartial pensions guidance from the Pension Wise website, or you can book an appointment over the telephone: 0800 011 397.

Please note that clicking this link may open the external website in a new window or tab.

Your retirement options

This next stage of your life can be full of opportunities and choice. It can be a time to rethink and reassess your priorities, and what you want to get out of life.

And like any great adventure, robust planning can make the difference between a good retirement and a great one.

However, along with all the opportunities that retirement brings, the responsibility to make the right choices, and ensure your money lasts as long as you do, is now with you.

It’s also important to remember that your financial circumstances will continue to change throughout your retirement. You will need to make ongoing choices, and review your strategy regularly to make sure your everything stays on track.

There is a lot to consider when you access your retirement benefits, and it’s important to remember that you don’t have to make all of your decisions in one go.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.

Should you require more information or have particular questions, we invite you to contact us at your convenience.

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Life Events

The decision to invest in private schooling is often a significant financial commitment that requires meticulous planning and management. At Apollo Private Wealth, we understand the complexities involved and offer specialized expertise to help you navigate this financial labyrinth. This article aims to provide you with actionable insights and strategies for managing school fees and private schooling expenses effectively.

Estate Planning

The decision to invest in private schooling is often a significant financial commitment that requires meticulous planning and management. At Apollo Private Wealth, we understand the complexities involved and offer specialized expertise to help you navigate this financial labyrinth. This article aims to provide you with actionable insights and strategies for managing school fees and private schooling expenses effectively.

Complex Cases

The decision to invest in private schooling is often a significant financial commitment that requires meticulous planning and management. At Apollo Private Wealth, we understand the complexities involved and offer specialized expertise to help you navigate this financial labyrinth. This article aims to provide you with actionable insights and strategies for managing school fees and private schooling expenses effectively.

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