Delaying taking your pension

Restrictions or charges for changing your retirement date

You might be able to delay taking your pension until a later date if your scheme or provider permits this. If you want your pension pot to remain invested after the age of 75, you’ll need to check with your pension scheme or provider that they will allow this. If not, you might need to transfer to another scheme or provider who will.

Tax-free growth
Your pension continues to grow tax-free, potentially providing more income once you access it. If you want to build up your pension pot further, you can continue to receive tax relief on pension savings of up to £40,000 each year (tax year 2018/19), or 100% of your earnings if you earn less than £40,000, until age 75.

The longer you delay taking your pension, the higher your potential retirement income. However, this could affect your future tax and your entitlement to benefits as you grow older, for example, long-term care costs. Your pension scheme or provider will inform you if there are any restrictions or charges for changing your retirement date, and the process and deadline for telling them. There may also be a loss of any income guarantees, for example, a guaranteed annuity rate (GAR), by delaying your retirement date.

Less risky funds
As the value of pension pots can rise or fall, it is essential to review where your pot is invested as you move towards the time you want to retire and arrange to move it to less risky funds if necessary.

In the event that you die before age 75, your untouched pension pots can pass tax-free to any nominated beneficiary, provided the money is paid within two years of the provider becoming aware of your death. If the two-year limit is missed, the money will be added to the beneficiary’s other income and taxed at the appropriate rate(s).

Lifetime allowance
If you die after 75 and your nominated beneficiary takes the money as income or as a lump sum payment, they’ll pay tax at their appropriate rate(s). This means that the money will be added to their income and taxed in the normal way.

If the total value of all your pension savings when you die exceeds the lifetime allowance (currently £1,030,000 tax year 2018/19), further tax charges will be payable by the beneficiary.

Turning pensions into money you can use

One of the most important decisions you will make for your future

Under the pension freedoms rules introduced in April 2015, once you reach the age of 55, you can now take your entire pension pot as cash in one go if you wish. However, if you do this, you could end up with a large Income Tax bill and run out of money in retirement. It’s essential to obtain professional advice before you make any major decisions about how to access your pension pot.

Deciding what to do with your pension pot is one of the most important decisions you will make for your future, and now you can access your pension in more ways than ever before. This leaves retirees with different options, from withdrawing lump sums in cash as and when needed to staying invested and drawing income, or to use how they wish. It is still possible to opt for the traditional route of buying an annuity offering a guaranteed income.

As well as understanding the various options for accessing benefits, when you are deciding what to do with your pension pot, you also need to consider your personal financial landscape. How long do you expect your investments and pensions to remain invested for? What do you want to achieve in the future, and how do you see your retirement playing out? How much investment risk are you willing to take? What income sources do you currently have or need to create, and how are they taxed?

Pension lifetime allowance

Putting a value on your pension savings in the future

The pension lifetime allowance is a limit on the value of payouts from your pension schemes – whether lump sums or retirement income – that can be made without triggering an extra tax charge. The lifetime allowance for most people is £1,030,000 in the tax year 2018/19.

It applies to the total of all the pensions you have, including the value of pensions promised through any defined benefit schemes you belong to, but excluding your State Pension.

From 6 April 2018, the standard pension lifetime allowance now increases annually in line with the Consumer Prices Index (CPI).

Charges if you exceed the lifetime allowance
It’s important to think about what the value of your pension savings could be in the future. If the cumulative value of the payouts from your pension pots, including the value of the payouts from any defined benefit schemes, exceeds the pension lifetime allowance, there will be tax on the excess – called the ‘lifetime allowance charge’.

The way the charge applies depends on whether you receive the money from your pension as a lump sum or as part of regular retirement income.

Lump sums
Any amount over your lifetime allowance that you take as a lump sum is taxed at 55%.

Your pension scheme administrator should deduct the tax and pay it over to HM Revenue & Customs (HMRC), paying the balance to you.

Any amount over your lifetime allowance that you take as a regular retirement income – for instance, by buying an annuity – attracts a lifetime allowance charge of 25%.

This is on top of any tax payable on the income in the usual way.

For defined contribution pension schemes, your pension scheme administrator should pay the 25% tax to HMRC out of your pension pot, leaving you with the remaining 75% to use towards your retirement income.

For example, suppose someone who pays tax at the higher rate had expected to get £1,000 a year as income, but the 25% lifetime allowance charge reduced this to £750 a year. After Income Tax at 40%, the person would be left with £450 a year.

This means the lifetime allowance charge and Income Tax combined have reduced the income by 55% – the same as the lifetime allowance charge had the benefits been taken as a lump sum instead of income.

For defined benefit pension schemes, your pension scheme might decide to pay the tax on your behalf and recover it from you by reducing your pension.

If you wish to avoid the lifetime allowance charge, it’s important to monitor the value of your pensions, and especially the value of changes to any defined benefit pensions, as these can be surprisingly large.

You might also wish to consider applying for protection if your pension savings are expected to exceed the lifetime allowance threshold.