Converting your pension pot into cash or income
Annuities and Drawdown
After the age of 55 you can start converting your pension pot into cash and income but normally it makes sense to start taking money from your pension pot when you stop working
Nowadays, many people don’t retire in the traditional way because they move from full time work to full time retirment over a period of time.
In the past most people converted their pension pots into regular income by purchasing an annuity or taking their scheme pension. Now, with the new pension freedoms, you can take money from your pension pot when and how you want.
Most pension pots allow you take a 25%-tax free cash sum and this is a popular and tempting option. You will have to pay tax on the remainging 75% no matter where it is taken as a lump sum or regular income.
There are basically three ways to convert your pension into cash and income.
- Cash lump sums - can be spread over a number of years
- Purchasing an annuity - guaranteed income for life
- Investing in pension drawdown - regular or ad hoc income payments
This all seems easy and straightforward but don’t be fooled as the decisions you make when converting your pension pot into cash or income are probably the most difficult financial decisions in personal finance.
If you are serious about maximising your pension income (or the money left to your family) you need to understand the following:
- Your personal retirment journey- planning ahead is more complicated than you think
- DB transfers sums- pros and cons of transfers
- Cash lump sums- watch out for tax
- Why Annuities are important – guaranteed income for life
- The flexibility and risks of Drawdown – control over income and investments
- Fixed term income plans- guaranteed income for short term
- How to manage your retirement risks-
- Chosing between an Annuity or Drawdown?- – this is the hardest question of all!
It is important you take the time to read and understand your options and the key issues so you can help your financial adviser and play an active role in the advice process. You may want peace of mind and security in retirement but you may end up with lots of worry and uncertainty if you make the wrong decisions.
If you want more reasons why should get financial advice read my online guide Financial advice - There is a lot at stake.