GUIDE TO YOUR RETIREMENT. Your choices explained. Pensions

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1 GUIDE TO YOUR RETIREMENT Your choices explained Pensions

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3 Please read this guide in conjunction with the Money Advice Service guide Your pension: it s time to choose which is included with your Retirement Options Pack. Note: This guide and the information in it about retirement choices only applies to pensions that are classified by the Government as Defined Contribution or Money Purchase Pensions, where the pension you receive is related to the contributions you make. This will include most personal pensions and stakeholder pensions, including those arranged through your employer, but will not include Defined Benefit pensions (for example where the pension you receive is determined by your salary and length of service). IN THIS GUIDE WE SET OUT: Page Section 1: step by step guide Deciding how to use your pension pot 6 Section 2: your choices explained The main pros and cons of each choice including how much tax you will pay and what will happen when you die 13 Option 1: Taking all your pension pot as a single lump sum 13 Option 2: Taking a guaranteed income for the rest of your life 17 Option 3: Taking part of your pension pot and leaving the rest invested to take at a later date 22 Option 4: Taking your pension pot at a later date 25 Summary: Main features of your choices 26 What happens to your pension pot when you die 27 Your pension choices and tax 28 Case studies: These show how much tax you might pay under the different options 29 3

4 A GUIDE TO YOUR RETIREMENT The decision about what to do with your pension pot is a very personal one. You now have more choice and freedom than ever before in what you can do with the pension pot you have saved with us. It s important that you think about your options carefully, so you can make the right choice for your individual circumstances. Your choices are: Your pension pot OPTION 1 OPTION 2 OPTION 3 OPTION 4 Take all your pension pot as a single lump sum Convert your pension pot into a guaranteed income for the rest of your life Take some of your pension pot now and leave the rest invested for another time Leave your pension pot invested and take it at a later date You can take a series of lump sum payments or income at different times or a mix of both 25% is tax-free With both of these options you can take up to 25% of your pension pot as tax-free cash 4

5 PENSION WISE: THE GOVERNMENT S GUIDANCE SERVICE To help you understand your options and make the right choices, the Government has made available a free and impartial guidance service Pension Wise to people, such as yourself, who are considering what to do with their pension pot. We strongly recommend that you use this service. Pension Wise will: Discuss your retirement options and explain how each option is taxed. Outline the potential issues you will need to consider including life expectancy, income and possible long-term care needs. Provide you with a record of the session and outline your next steps, including any information or advice you will need and further details on how to shop around. This guidance can be accessed in a variety of methods to suit your needs. Online: the service is available at pensionwise.gov.uk Over the phone: call between 8am and 8pm, Monday to Friday, if you re in the UK. If you re outside the UK, call This service is provided by The Pensions Advisory Service. Pension Wise will not provide advice or recommend specific products or providers. If you feel you need advice or do not understand information provided by Pension Wise, we recommend you speak to a regulated financial adviser. The Where to get help section of this guide includes details of how to find a regulated financial adviser in your local area. Advisers may charge for providing advice and should confirm any cost to you beforehand. Before you use the Pension Wise service: Gather information about your pension(s) and other sources of income. Check whether any of your pension policies have Guaranteed Annuity Rates, other guarantees, or any restrictions or charges such as Market Value Reductions (these should normally be set out in your retirement documents). If you had a pension but no longer have the details you can try and find your pension through the Government s Pension Tracing Service. They can be contacted online at gov.uk/find-pension-contact-details or by telephone on If you re outside the UK, call Lines open between 8am and 6pm, Monday to Friday (except bank holidays). Face to face: call between 8am and 8pm, Monday to Friday. Face-to-face appointments take place at branches of the Citizens Advice Bureau. 5

6 SECTION 1 STEP BY STEP GUIDE Step By Step Guide Timescales You need to allow yourself plenty of time to consider the options available to you. You may need to take further action, such as getting quotes from other providers, getting advice and then converting your pension pot to another product or moving it to another provider. This takes time, so you need to ensure you start as early as possible to make sure you are able to take your benefits when you want to. 1. Are you ready to take your pension pot now? The first thing to consider is whether to take your pension pot now, or to wait a while. Why might you want to wait? You are still working or have other pensions or income which means you don t need the money right now To give your pension pot more time to potentially grow and to see if you can get a higher income 2. How much money will you have to live on? Are you retiring completely, or do you intend to carry on working in some capacity? If you do intend to carry on working, what income will you receive from this? What income will you receive from other pension pots? You may receive an income from: State Pension Workplace pensions For people reaching state pension age the new single-tier State Pension applies. You cannot access the State Pension before your state pension age so you will need to know what that age is. You normally pay a percentage of your salary and this is automatically deducted from your wage each pay day. Your employer may also pay into the pension scheme for you. There are two main types of workplace pension: Defined Benefit (DB) where the amount of income you receive from your pension is linked to your salary, and Money Purchase (MP) where you and your employer s contributions are used to build up a pot of money. e.g. a Group Personal Pension or employer sponsored stakeholder pension scheme. You can normally choose how and when you want to use that pot. Private pensions You will have arranged this yourself with a pension provider (or you may have used the services of a financial adviser to help you). These are normally Personal Pensions or Stakeholder Pensions that you have set up yourself with a pension provider. Your contributions are used to build up a pot of money and you choose how and when you want to use that pot. If you don t know how much you are likely to get from these pension arrangements then you can contact your employer or provider to find out. 6

7 You can find out your state pension age on the Government s website gov.uk/state-pension-age and you can check how much state pension you could get at gov.uk/check-state-pension. Important Reminder Guaranteed Annuity Rates or other guarantees Your retirement documents will normally tell you if your pension has a Guaranteed Annuity Rate or other guarantees, but if you are in doubt you should check with your pension provider(s). These guarantees will often provide you with an income for life much higher than you might normally get. If you decide to move your pension pot elsewhere or use it other than to take an income you may lose these valuable guarantees. Step By Step Guide In respect of your policy with us, we ll confirm whether or not your policy has a Guaranteed Annuity Rate or other guarantees in your Retirement Options pack. We ll also explain the circumstances where you will lose these valuable guarantees. What other sources of income or savings will you have? Your savings could include: Cash, such as bank or building society deposit accounts ISAs Stocks and shares Other savings or investments You may also have money tied up in your property that you could use, but you should get financial advice before doing so as it is not suitable for everyone and may not be available on all properties. Having other sources of income or savings may mean that you aren t completely reliant on your pension pot to provide an income. 3. Do you have any debts that you need to pay? If you have outstanding debts, for example mortgage balances, credit cards, loans or overdrafts, you should think carefully before committing any of your pension pot to repay any debt. We recommend you seek advice before making any decisions. 4. How much money will you need? As well as calculating your income, you will also need to take account of your regular outgoings. How much money will you need to cover your essential day to day living expenses? Will you have the income or savings to cover the other things you d like to do, e.g. holidays, entertainment? An income from your pension will help to cover these essential costs. Do you need an income from your pension to pay for these extras, or would you prefer to take lump sums from your pension or use other savings to pay for them? 7

8 Will your monthly income cover your basic monthly outgoings? You might want to think about having a guaranteed income for life to cover these basics. Step By Step Guide If not, then can you use some of your savings to cover these outgoings? Remember that people are living longer meaning that you will have to make your savings last longer. Will your income cover the things you d like to do? Think about the extras you would like: holidays, going out etc. The Money Advice Service has some online tools available to help you calculate your detailed spending breakdown at moneyadviceservice.org.uk but you can also use the budget planner on the next page to help you understand your needs. 8

9 Budget planner Monthly income State Pension Workplace pensions Private pensions Income from other savings Income if continuing to work Other income Total monthly income Savings Cash ISAs Stocks and shares Other savings Total savings Monthly outgoings Mortgage/Rent Utility bills Council tax House insurance Car insurance Car tax Servicing Credit/Store card debt Life insurance Food Other Total Monthly outgoings Things I d like to do Eating out Holidays Entertainment and socialising Other Total monthly spend on things I d like to do Step By Step Guide 9

10 Step By Step Guide 5. How long might you need your money to last for? Rising life expectancy means that you will need your pension pot to last longer than you might think. If you are age 65, then, on average, men will live for another 19 years to age 84 and women for 21 years to age 86*. 4.7% of men and 7.4% of women are expected to live to age 100** % 7.4% 93 Age 86 Average Average Male Female Age 65 Further 18.6 years 4.7% living to 100 years Age 65 Further 20.9 years 7.4% living to 100 years * Figures taken from the Office of National Statistics Life Expectancy at Birth and at Age , published December 2018 ** Figures taken from the Office of National Statistics Past and Projected Data from the Period and Cohort Life Tables 2016, released December 2017 If you intend to use other savings and investments, or take your pension pot as a lump sum to finance your spending, you will need to think about how long these savings might last. It s an important decision, and, if you get it wrong, you could run out of money. 6. Do you need to use your pension pot to secure a guaranteed income for life, or do you want to use it more flexibly? If you do not need a guaranteed income for life and want to take your pension pot more flexibly you could take it all now as a lump sum, or take part now and leave the remainder invested to a future date. How you choose to take your pension pot could affect how much tax you pay and/or your entitlement to means-tested state benefits. It will also affect how you can provide for your dependants when you die. We describe each of these choices in more detail in Section 2 Your Choices Explained. 10

11 7. Shop around Taking an income from your pension pot If you are considering taking an income from your pension pot, you do not have to take it from us as your existing pension provider. Different product providers use different factors when calculating how much income they will offer you, such as where you live, your health and your lifestyle. The cost of adding features such as providing for your dependants or protecting against inflation can also vary between providers. So, by shopping around, you may be able to get a higher income than we can offer you, or a type of income product that is more suitable to your needs. This is not always the case, but we strongly recommend that you shop around before you buy. Step By Step Guide If you find that you can obtain a higher income from another provider, you can move your pension pot to that provider without incurring any penalty (you may see this referred to as the Open Market Option in your retirement documents). Taking part of your pension pot now and leaving the rest invested to a future date Likewise, if you want to access your pension pot flexibly, you do not need to take a product from us and other providers may offer more choice, lower charges or more suitable investments. Again, we strongly recommend you shop around before you buy. The Money Advice Service guide that s included with your Retirement Options pack provides information on how to shop around. 1. Decide on the type of income you want from your pension 2. Check what your current pension provider is offering 3. Visit the Money Advice Service website at moneyadviceservice.org.uk/en/tools/ annuities to understand and compare annuities 4. Consider if you need the help of a financial adviser The income you get from us might not be the highest you can get and so we strongly recommend you shop around. Guaranteed Annuity Rates or other guarantees If your pension has a Guaranteed Annuity Rate or other guarantees it will often provide you with an income for life much higher than you might normally get. If you decide to move your pension pot elsewhere, you may lose these valuable guarantees. 11

12 8. Where to get help Step By Step Guide Pension Wise Money Advice Service Backed by the Government, giving you free and impartial guidance to understand your retirement options Free and impartial money advice, set up by the Government Advice and guides to help improve your finances Tools and calculators to help you keep track and plan ahead Online: pensionwise.gov.uk Telephone: Online: moneyadviceservice.org.uk Telephone: Support in person, over the phone and online Pension Service Provide quotes and information on your State Pension Online: gov.uk/check-state-pension Telephone: Probate, Inheritance Tax and Trusts Helpline Helping you to understand Inheritance Tax procedures Online: hmrc.gov.uk Telephone: The Pensions Advisory Service TPAS offer free and impartial guidance to people with workplace and personal pensions Online: pensionsadvisoryservice.org.uk Telephone: Financial Advice Enables you to find a financial adviser in your area Online: Visit the Money Advice Service s Retirement Adviser Directory at directory.moneyadviceservice.org.uk Alternatively, find a financial adviser at unbiased.co.uk Financial advisers usually charge for their services, so you should confirm any costs beforehand. The Pension Tracing Service Find a lost pension Online: gov.uk/find-pension-contact-details Telephone: Remember: The Government s Pension Wise service is free and impartial and is there to help you with your retirement choices. 12

13 SECTION 2 OPTION 1: TAKING ALL YOUR PENSION POT AS A SINGLE LUMP SUM You can take all of your pension pot as a single lump sum. If you take all of your pension pot as a single lump sum, one quarter of the amount paid will normally be tax-free and the remainder will be taxable as income. You should consider whether this best suits your circumstances. If you take your pension pot as a single lump sum then you will need to consider to what extent you can still meet your living expenses. Pros You have complete flexibility to use the money whenever you like Cons Once you ve spent it, it s gone. You need to consider whether you need it to last for the rest of your life or if you have other income you can rely on. 25% of your lump sum is tax-free The remaining 75% of your lump sum is added to your other income for the tax year and taxed as earned income. Depending on how much other income you have, taking all of your pension pot as a lump sum might push you into a higher income tax bracket. Your Choices Explained Alternatively, by taking a series of lump sums over different tax years, you may avoid paying a higher rate of tax in any one year see Option 3 Taking part of your pension pot and leaving the rest invested to take at a later date for further details. Taking your pension pot as a lump sum could affect your entitlement to means-tested State Benefits. You might get lower benefits as a result. If you want to continue to contribute to a pension and your contributions (including those of your employer or a third party, and the tax relief you receive) exceed 4,000, you may incur an additional tax charge. What tax will I have to pay on a lump sum? If you decide that you want to take all of your benefits as a lump sum it will be taxed in the following way: 25% of the lump sum is not taxed at all. The remaining 75% is taxed as income in the same way as if you had earned that amount during the tax year. Depending on the size of the lump sum and your other income this could push you into a higher tax bracket. See the examples at the end of this Guide for more information. 13

14 How much tax will you deduct? The amount of tax that we will deduct is likely to be different to what you will owe. We will deduct tax in line with instructions from HM Revenue & Customs (HMRC). This means that in many cases, especially where your pension pot is more than 10,000, we will deduct tax on the taxable part of your lump sum using the emergency tax code and on a month 1 basis. The result is that in many cases we will deduct much more tax than you should pay. For example: In the example at the back of this Guide, Peter takes a lump sum of 20,000. We explain that in his circumstances as a basic rate tax payer with no other income, he will owe 500 tax. This is the amount that Peter should pay. But, when calculating the amount of tax that HMRC instructs us to collect, the amount we will actually deduct will be 5, Your Choices Explained Details of how the calculation works in practice are included below. So, in this example, we will have deducted considerably more tax than Peter should pay. HOW DID WE CALCULATE THE AMOUNT OF TAX WE DEDUCTED FROM PETER S LUMP SUM? The table below shows the tax rates for the 2019/20 tax year as they would apply on an emergency code, month 1 basis: Band Rate of Tax Month 1 Income Band Personal Allowance 0% on the first 0-1,042 of income Basic Rate 20% on income between 1,042-4,167 Higher Rate 40% on income between 4,167-13,542 Additional Rate 45% on any income above 13,542 The above table is based on the UK (excluding Scotland) rates/bands of income tax. A resident of Scotland will be taxed in the same way, but subject to the rates/bands of income tax determined by the Scottish Parliament. 14

15 So, referring back to our earlier example, Peter had a lump sum of 20,000 with the first 5,000 paid tax free, and the remaining 15,000 subject to tax. The tax deducted is calculated as follows: Band Rate of Tax Month 1 Income Band Tax Calculation Tax Deducted Personal Allowance 0% on the first 0-1,042 of income nil nil Basic Rate 20% on income between 1,042-4,167 Higher Rate 40% on income between 4,167-13,542 3,125 x 20% ,375 x 40% 3, Additional Rate 45% on any income above 13,542 1,458 x 45% Total 5, How will I know if I have paid more tax than I should have? You should refer to HMRC if you are not sure if you have paid too much tax. They have a tax checker on their website hmrc.gov.uk which you may find useful. Your Choices Explained Remember that in some cases the amount of tax we will deduct may be less than you should actually pay and as a result you may need to pay back some tax to HMRC. How can I claim back any overpaid tax? HMRC have created a process for you to be able to claim back any overpaid tax quickly. You can find out more about what you need to do by contacting your local tax office or by visiting HMRC s website at hmrc.gov.uk We will also tell you what you need to do once we have paid your lump sum. If you don t actively claim back any overpaid tax, HMRC will automatically review the position after the end of the tax year and issue a tax calculation to you detailing any over or underpayment of tax. If I have means-tested State Benefits how will these be affected? Means-tested State Benefits are paid according to whether your income and savings fall within certain limits. These benefits include, among others, Pension Credit, Housing Benefit (for rental costs) and Council Tax Support. If you think you might be entitled to these benefits then you need to consider if the way you take your pension pot will affect your benefit entitlement, and you may need to seek financial advice. You can find out more about means-tested benefits on-line at gov.uk or through your local Citizens Advice Bureau. 15

16 What happens when I die? Inheritance Tax may be payable on the total value of your estate. Any pension pot you have taken as a lump sum and put into savings would form part of your estate along with the value of your house, possessions, cash, savings and investments etc less any debts and funeral expenses. If the value of all your assets exceeds the Inheritance Tax threshold in the year that you die, Inheritance Tax is payable on the value of the assets above the threshold. It can be difficult to decide whether Inheritance Tax is payable on pension benefits. Detailed information is available by visiting the Government website hmrc.gov.uk or contacting the Probate, Inheritance Tax and Trusts Helpline on (or if you live outside the UK). They can help you understand your Inheritance Tax responsibilities and the procedures. Your Choices Explained If I take all of my pension pot as a single lump sum, can I still keep paying into another pension? Yes, you can still pay into another pension. If you want to contribute more than 4,000 each year into a money purchase pension, such as a Personal Pension or Stakeholder Pension, you may become subject to a tax charge. Your contributions, any contributions made on your behalf by your employer or a third party and tax relief all count towards the 4,000 limit. Large pension pots taken past age 75 If you want to take your pension after the age of 75, and have pension savings of more than 1,055,000, then you may be prevented from taking this lump sum. If you think this might affect you then we recommend you seek financial advice. 16

17 OPTION 2: TAKING A GUARANTEED INCOME FOR THE REST OF YOUR LIFE If you decide that you want to take an income from your pension pot, then one of the ways of doing this is by buying a lifetime annuity which converts your pension pot into a regular income which is guaranteed for the rest of your life. If you take this option, then whatever happens you will get a regular income for the rest of your life. You can also choose to have that income payable to your spouse or partner in the event that you die before they do, and to protect your income against the effects of inflation. How much income you get will depend on a number of things, such as: The amount you have saved into your pension, and whether or not you want to combine other pension pots Your age Whether you choose to take any tax-free cash and how much this is The features you choose, such as protecting your income from the effects of inflation, or providing an income for your spouse or partner should you die before them Other factors such as your health and lifestyle The economic circumstances generally when interest rates are lower, you get a lower income and when they are higher you get more. Your Choices Explained Pros Pension savings are designed to provide for you during your retirement. By taking out an annuity, you know what your income will be and this is guaranteed for life. This income can be used to help with your bills and living expenses. Your income won t change if the rates used in converting your pension pot into a regular income go down in the future. Features can be added to your annuity, such as to provide protection against inflation and to provide an income for a dependant if you die before them. You are able to take up to 25% of your pension pot as tax-free cash, with the remainder being used to provide an income. Cons Buying a lifetime annuity is a one-off decision that cannot be changed. So you need to be sure about the choices you make (including the features of your annuity) before you commit. You won t benefit if the rates used in converting your pension pot into a regular income increase in the future. Adding features to your annuity can reduce the amount of income it provides, and once your payments have started these features cannot be added or changed at a later date. The more tax-free cash you take, the smaller the pension pot you ll have left over to provide you with an income. 17

18 How your health and lifestyle can affect how much income you receive Some annuity providers offer enhanced annuities. These take your health and lifestyle into account when determining the income you will receive. These can arise from fairly common factors like: smoking having high cholesterol, or being overweight, up to more serious or life-threatening conditions such as: cancers, and heart disease. Your Choices Explained Your income will not go down as a result of medical information you give, but it could increase. You should check that this information is being taken into account when obtaining quotes for your annuity. Annuity features In its simplest form, an annuity will pay you a guaranteed income for the rest of your life. However, you can choose to add features to your annuity, such as providing an income to your spouse or partner in the event that you die before they do, or to protect your income against the effects of inflation. The main features you need to consider when choosing your annuity are shown in the table on the next page. You will need to decide how important these features are to you as the choices you make about how your income is paid will affect the amount of income you receive. 18

19 ANNUITY FEATURES Tax-free cash Single or joint life You can usually choose to take up to 25% of your pension pot as a taxfree lump sum and use the remainder to purchase your lifetime annuity. However, by taking a smaller amount of tax-free cash (or no tax-free cash at all) you will receive a higher income. A single life annuity pays you a guaranteed income for the rest of your life. On your death, payments will stop. Guarantee period Are you married or do you have a partner or someone else who is financially dependent on you? Will they need an income if you die first? A joint life annuity continues to pay some or all of the income you were receiving to your spouse or partner if you die first. Because a joint life annuity pays an income to your chosen dependant if you die first, it will reduce the income you receive during your lifetime. A Guarantee Period will ensure that your income payments are paid for a set period of time, regardless of whether you die earlier. If you die during the annuity s Guarantee Period, payments will continue to be paid to your dependant(s) for the remainder of the Guarantee Period. An annuity with a Guarantee Period is sometimes considered to be a substitute for a joint life annuity, but that s not the case because it only provides an income to your dependant if you die within a specified number of years from the start of your annuity, e.g. 5 or 10 years. As such, a Guarantee Period won t fully protect your dependants over the long term. Your Choices Explained Level or escalating Payment frequency and timing Value protection Do you want your income payments to stay the same (a level annuity), or increase each year to protect you against some or all of the effects of inflation on your income (an escalating annuity)? A level annuity will provide you with a higher starting income, but the effects of inflation over time will reduce the amount you can buy. How often do you want your income to be paid monthly, every 3 months, every 6 months or once a year? And do you want to receive your income as soon as your annuity has been set up (in advance) or at the end of your chosen payment frequency (in arrears)? When you die, do you want to pass on some of the value of your pension pot to a dependant? Value protection is a way of passing on some of the value, less the value of the income you have received up to the date you die. E.g. if your pension pot is 30,000 and you die after receiving 20,000 worth of income, the difference of 10,000 would be paid to your nominated dependant. Not all providers offer this, and some limit the proportion of the value you can pass on, or will only pay if you die within a certain time period, such as before your 75th birthday. 19

20 You don t have to take a lifetime annuity to convert your pension pot into an income, there are some other types of annuity that will do this: Other annuity types Fixed-term annuity These have different features but the main one is that you will not receive a guaranteed income for the rest of your life. You are paid a guaranteed income for a fixed number of years. At the end of the period you will need to decide what to do with the remainder of your pension pot, which could include taking a lump sum payment or using the remaining pot to purchase a further income. Your Choices Explained Investment-linked and with-profits annuities These provide a variable income which is linked to the investment performance of the fund(s) your pension pot is invested in. This means the income could increase because of future investment performance, but could also fall in value. Investment-linked annuities may also be exposed to transactional charges (such as a fee for switching funds) or annual management charges. If you are interested in a fixed-term, with-profits or investment-linked annuity we recommend you seek financial advice. Tax You can usually choose to take up to 25% of your pension pot as tax-free cash and use the remainder to purchase a lifetime annuity, although if you choose not to take a lump sum and use your total pension pot to purchase a lifetime annuity your income will be higher. The regular income you receive will be treated as taxable income. This means you ll still have a personal allowance and a tax code, and may pay tax on the regular income payment you receive depending on your total taxable income in a year. HMRC determines how much tax you will pay and will advise your provider of the tax code to use, and therefore how much tax to deduct. Any tax due is deducted from your regular pension payments before they are paid to you. Please bear in mind, when you receive quotes from us or other providers they will show your income before any tax is deducted. 20

21 What happens when I die? If you have a single life annuity and no other features, your pension stops when you die. Otherwise, the tax rules vary depending on your age as shown below. If you die before age 75: Income from a joint life annuity will be paid to your dependent or other nominated beneficiary tax-free for the rest of their life. If you die within a guarantee period the remaining annuity payments will pass tax-free to your nominated beneficiary then stop when the guarantee period ends. Any lump sum payment due from a value protected annuity will be paid tax-free. If you die age 75 or over: Income from a joint life annuity will be taxable at your dependent or other nominated beneficiary s highest tax rate and payable for the rest of their life. If you die within a guarantee period, the remaining annuity payments will be taxable at your nominated beneficiary s highest tax rate and payable until the end of the guarantee period. Any lump sum payment due from a value protected annuity will be taxable at the beneficiary s highest tax rate. Your Choices Explained 21

22 OPTION 3: TAKING PART OF YOUR PENSION POT AND LEAVING THE REST INVESTED TO TAKE AT A LATER DATE You can take payments from your pension pot as and when you need, to suit your own personal circumstances. These payments can be taken as a series of lump sums, income at different times or a mixture of both. The rest of your pension pot is left invested where it can continue to grow tax-free. Your existing pension is unlikely to offer this level of flexibility and you might need to transfer to another pension provider or into a different product if you want this option. Different products will offer different features, as we explain below. Your Choices Explained Tax-free cash Certain products will allow you to take up to 25% tax-free cash on your whole pension pot upfront. If you do this, all future payments will be treated as taxable income. Other products will allow you to take up to 25% tax-free cash each time you take a payment and the rest is treated as taxable income (see tax implications on the next page). Investment choices/charges If you change providers or take out a different product you will have to make new investment choices and different (possibly higher) charges may apply. Taking an income Some products are designed to allow you to take a series of lump sum payments rather than income. If you want to take a regular income from part of your pension pot you may need to convert that part of your pot into an annuity or other type of retirement income product. Other products are designed to provide an income. You choose funds to invest in that match your income objectives and attitude to risk and set the income you want, though this may be adjusted periodically depending on the performance of your investments. To help provide more certainty, you can at any time use all or part of your remaining pension pot to buy an annuity or other type of retirement income product that provides a guaranteed income. Pros You can take control of how and when you take payments from your pension pot and spread these over whatever time period you want. Cons Unlike a Lifetime Annuity which provides a guaranteed income for life, your pension pot may run out. This may be true if you take higher levels of withdrawals in the earlier years, especially if investment performance is poor. 22

23 Pros You can choose to use all or part of your remaining pension pot to take an income at any time. Cons The amount of income you would receive is not guaranteed charges may apply when you take an income, whilst poor investment performance could restrict the amount you can take. If you buy an annuity with all or part of your remaining pension pot, the rate used in converting your pension pot into an income may change over time. So if you choose to buy an annuity at a later date then the amount of income it provides may be more or less than now. Your pension pot remains invested with the potential for it to grow. Taking the whole of your pension pot as a single lump sum may push you into a higher tax band, depending on the size of your pot and any other income you have. By taking a series of lump sums over different tax years, you may avoid paying a higher rate of tax in any one year. The value of your pension pot can go down as well as up, and you could get back less than you invested. The value of your pension pot will affect the future income you receive. You will have to decide how much risk to take when leaving your money invested. Tax laws could change in the future. Your Choices Explained You can normally take up to 25% of your pension pot as tax-free cash, with the remainder being used to provide an income or take as a lump sum at a future date. The more tax-free cash you take, the smaller the pension pot you ll have left over to provide you with an income if you choose to do this at a future date. If you want to continue to contribute to a pension and your contributions (including those of your employer or a third party, and the tax relief you receive) exceed 4,000, you may incur an additional tax charge. Tax You will normally have the option of taking up to 25% tax-free cash (although you may not be able to take this all in one go and may have to take it with each payment). The remaining 75% will be taxed as income, i.e. depending on your total taxable income in the year you take payment, you may pay income tax on these payments (see Peter and Joan s examples in the Case Studies). 23

24 What happens when I die? Any funds still invested in your pension will be paid tax-free to your beneficiary if you die before your 75th birthday. If you die on or after age 75 any funds still invested in your pension will be taxed at the beneficiary s highest tax rate. Can I keep paying into another pension? Yes, you can still pay into another pension. If you want to contribute more than 4,000 each year into a money purchase pension, such as a Personal Pension or Stakeholder Pension, you may become subject to a tax charge. Your contributions, any contributions made on your behalf by your employer or a third party and tax relief all count towards the 4,000 limit. Your Choices Explained 24

25 OPTION 4: TAKING YOUR PENSION POT AT A LATER DATE You don t have to take your pension pot at the retirement date you selected when you first took out your pension. Instead, you can delay taking it until some time in the future. Pros Your pension pot may be larger if you re able to pay into it for longer or leave it invested for longer. Cons Depending on how your pension is invested, the value of your pension pot could go down as well as up, and you could get back less than you invested. There is no guarantee that your pension pot will be larger if you delay taking your benefits. You may get a higher income if the rates used in converting your pension pot into an income improve. You may get a higher income because your pension will not have to pay out for as long. Tax You may get a lower income if the rates used in converting your pension pot into an income get worse. The treatment of pensions has undergone major changes in recent years. There is no guarantee that the tax treatment of pensions or the choices available to you will remain the same in the future. The tax you pay will depend on how you choose to take your pension pot and the tax regime at that time. There is no guarantee that the tax treatment of pensions or the choices available to you will remain the same in the future. Your Choices Explained What happens to my pension pot when I die? If you die before you have taken your pension pot then in most cases your provider will pay either a lump sum or an income to your beneficiaries. If you die before age 75: Your pension pot will normally be paid tax-free, either as a lump sum or an income. If you die age 75 or over: Your pension pot will be taxed as income at the beneficiary s highest tax rate. 25

26 SUMMARY Main Features of Your Choices Option Risk Option 1 Take all your pension pot as a lump sum Option 2 Convert your pension pot into a guaranteed income for the rest of your life Option 3 Take some of your pot now and leave the rest invested for another time. Option 4 Leave your pot invested Access to your funds Provides a guaranteed income for life with the option to provide an income for your dependants and/ or protect against inflation Can access your pension pot flexibly to take a series of lump sums and/or income as and when you need Your pension pot may go up if you re able to pay into it for longer or leave it invested for longer Does not provide a guaranteed income Once set up your income cannot be changed or cashed in Does not provide a guaranteed income Depending on how your pension is invested, the value of your pension pot could go down as well as up, and you could get back less than you invested. You run out of money in retirement unless you have other sources of income You cannot access your pension pot if your circumstances change You run out of money or have less money to live off in retirement unless you have other sources of income Pension and tax rules may change which affect how you can take your pension pot in future and the amount of tax you pay Summary 26

27 What happens to your pension pot when you die Option Money taken as tax-free cash or a lump sum Funds still invested Income taken Option 1 Take all your pension pot as a lump sum Any lump sum or tax-free cash that you haven t spent will form part of your estate and will be passed on to your beneficiaries in line with your will. They may pay Inheritance Tax depending on the value of your estate. Option 2 Convert your pension pot into a guaranteed income for the rest of your life Any tax-free cash that you haven t spent will form part of your estate and will be passed on to your beneficiaries in line with your will. They may pay Inheritance Tax depending on the value of your estate. You can choose an income for life that is guaranteed to be paid for a certain length of time even if you die earlier. Such payments will be paid to your beneficiary and/or You can choose for your dependant to be paid an income if you die before them. You will need to choose the amount and who will receive it before you start to receive your own income. If you die before your 75th birthday the income will be payable tax-free. If you die later, the income is taxable at the beneficiary s highest tax rate. Summary Option 3 Take some of your pot now and leave the rest invested for another time Any lump sum or tax-free cash that you haven t spent will form part of your estate and will be passed on to your beneficiaries in line with your will. They may pay inheritance Tax depending on the value of your estate. Any funds remaining invested in your pension will be paid tax-free if you die before your 75th birthday. If you die age 75 or above, any funds remaining in your pension pot will be taxed at the beneficiary s highest tax rate. If you have taken an income in a way which provides for payments to your dependant on your death, then if you die before your 75th birthday the income will be payable taxfree. If you die later, the income is taxable at your dependent s highest tax rate. 27

28 Option 4 Leave your pot invested with the aim of receiving higher benefits later on Your pension pot will normally be paid tax-free if you die before your 75th birthday. If you die age 75 or over, then your pension pot will be taxed as income at the beneficiary s highest tax rate. Your pension choices and tax Below is a summary of the main points and choices you need to consider when deciding how to take your pension pot. It is important that you understand how taking your pension pot will affect your tax position and the amount of tax you will pay. You may want to discuss this with a regulated financial adviser. The Where to get help section of this guide includes details of how to find a financial adviser in your local area. Advisers may charge for providing advice and should confirm any cost to you beforehand. Summary Option Tax-free Taxed Future payments Option 1 Take all your pension pot as a lump sum Option 2 Convert your pension pot into a guaranteed income for the rest of your life Option 3 Take some of your pot now and leave the rest invested for another time Option 4 Leave your pot invested 25% tax free. 75% is taxed as income. Up to 25% tax-free cash. Take up to 25% of the payment as tax-free cash. Take up to 25% of your whole pension pot as tax-free cash. Income is taxed. The remainder is taxed as income. Each future payment can be taken with up to 25% tax-free cash and the remainder taxed as income. Each future payment will be taxed as income. The tax you pay will depend on your choices and the tax regime when you come to take your pension pot. Examples of how this might work are included in the following Case Studies. 28

29 Case Studies To make the examples easier to understand, we have used the UK (excluding Scotland) 2019/20 income tax rates/bands throughout and assumed there is no growth in the remaining funds. A resident of Scotland will be taxed in the same way, but subject to the rates/bands of income tax determined by the Scottish Parliament. The case studies show the amount of tax ultimately payable under each retirement option. The amount of tax we will deduct may be different to what is actually owed, as we deduct tax in line with instructions from Her Majesty s Revenue & Customs (HMRC). Any overpaid tax can be claimed back from HMRC. Example A Peter is age 64 and has a pension pot worth 20,000. He has no other income and a personal tax allowance of 12,500 (which means he only pays tax on income over 12,500). He needs to take some money from his pension pot before his State Pension is paid from age 65. Peter s choices Peter will receive Peter will pay in tax Option 1 Take the 20,000 as a lump sum 5,000 is paid tax-free. 15,000 taxed as income. Peter will have to pay tax on the difference between his income ( 15,000) and his personal allowance ( 12,500) at a basic rate of 20%. Peter will have to pay tax of 500 Peter will receive 19,500 from his pension pot. Peter pays 500 in tax.* *This differs from the amount of tax we will actually deduct. Please go to page 14 of this guide for more information. Option 2 Convert his pension pot into a guaranteed income for the rest of his life Peter takes 5,000 tax-free cash. Peter uses the rest of his pension pot to buy an annual retirement income of 625 each year for the rest of his life. Peter s income is less than his personal allowance of 12,500 each year and so he pays no tax. Peter will receive a one-off payment of 5,000 and 625 each year for the rest of his life. Peter pays no tax. Option 3 Take 10,000 as a lump sum now and leave the rest invested to take at another time 2,500 is paid tax-free. 7,500 taxed as income. 10,000 remains in the pension pot to take at a later date either as a lump sum or as an income for life. The 7,500 that Peter takes now is less than his personal allowance and he has no other income so no tax is payable. Peter will receive 10,000 from his pension pot and 10,000 will remain invested to take at another time. If current tax rules remain unchanged then Peter will be able to take the first 25% of his remaining funds tax-free, with the rest taxed as income. (See below for what happens when he takes his remaining funds.) Peter pays no tax. Case Studies 29

30 Option 4 Leave all his pension pot invested to take at a future date The tax Peter will pay will depend on how he chooses to take his pension pot and the tax regime when he comes to take it. If Peter chooses Option 3 to take 10,000 as a lump sum and leaves the remaining 10,000 invested, and then takes a second lump sum of 10,000 the year after when, in addition, he will also start to receive the full State Pension of per week ( 8,767 per year) in tax year 2019/20: Peter s choices Peter will receive Peter will pay in tax Year 1 Peter takes 10,000 as a lump sum now and leaves the rest invested to take at another time 2,500 is paid tax-free. 7,500 taxed as income. 10,000 remains in the pension pot to take at a later date either as a lump sum or as an income for life. The 7,500 that Peter takes now is less than his personal allowance and he has no other income so no tax is payable. Peter will receive 10,000 from his pension pot and 10,000 will remain invested to take at another time. If current tax rules remain unchanged then Peter will be able to take the first 25% of his remaining funds tax-free, with the rest taxed as income. Peter pays no tax. Year 2 Peter takes his remaining funds of 10,000 as a lump sum 2,500 is paid tax-free. 7,500 taxed as income. Peter is taking 7,500 which is classed as income from his pension pot and will receive a 8,767 state pension, making his total earnings 16,267. In total, Peter has received 19,247 from his pension pot. Peter has paid 753 in tax. Peter does not pay tax on the first 12,500 of his income, meaning that only 3,767 is taxable. Case Studies Peter will pay 20% basic rate income tax on the 3,767 meaning that he pays tax of

31 Alternatively, if Peter had chosen to take 25% tax-free cash from his whole pension pot and left the rest invested to take the following year: Peter s choices Peter will receive Peter will pay in tax Year 1 Peter takes 25% of his pension pot ( 5,000) as tax-free cash and leaves the rest invested to take at another time 5,000 is paid tax-free. 15,000 remains in the pension pot to take at a later date either as a lump sum or as an income for life. Peter receives 5,000 from his pension pot and 15,000 will remain invested to take at another time. If current tax rules remain unchanged then when Peter takes the remainder of his pension pot it will be taxed as income. Peter pays no tax. Year 2 Peter takes the remainder of his pension pot as a lump sum 15,000 is taxed as income. Peter is taking 15,000 which is classed as income from his pension pot and will receive a 8,767 state pension, making his total earnings 23,767. In total, Peter has received 17,747 from his pension. Peter has paid 2,253 in tax. Peter does not pay tax on the first 12,500 of his income, meaning that only 11,267 is taxable. Peter will pay 20% basic rate tax on the 11,267 meaning that he pays tax of 2,253. Case Studies 31