3 practical ways to withdraw your pension money in 2023
After many years of saving, it can feel daunting to have to decide how to withdraw your pension money as you approach retirement.
Since the introduction of Pension Freedoms in 2015, there are now several different ways that you could withdraw your pension funds. There’s certainly no one-size-fits-all approach, and by carefully considering the pros and cons of each method, you can discover which one is right for you.
Read on to learn more about three practical routes that could enable you to create your retirement income.
1. Buying an annuity ensures you’ll have a guaranteed annual income in retirement
When you buy an annuity, you exchange a lump sum (normally from your pension) for a guaranteed income either for the term of the annuity or for the rest of your life.
The amount of income you receive each year will depend on a few factors, including how much you have available in your pension pot to spend on the annuity, how old you are, the rate of the annuity, your health, and whether you choose to protect the income from inflation.
You can choose to receive the income from your annuity on a monthly or annual basis, or sometimes every six months. You can also choose for your annual income to increase by a certain percentage each year, or in line with inflation. This option can mean that your starting income is lower than if you chose a level plan, but it does mean that the payments will increase in value each year.
You may find that having a guaranteed level of income each year brings you peace of mind and allows you to enjoy your retirement without worrying about money. But it’s important to remember that once you have bought an annuity, you can’t normally change it. This lack of flexibility might not be suitable for everyone.
Another key consideration is the annuity rate that your provider is offering. Different providers will offer different rates. So, if you would like to purchase an annuity, it’s sensible to shop around to make sure you can get the highest possible rate when you buy.
Research conducted by Which? has found that shopping around before you commit to an annuity product can mean you are 20% better off during your retirement.
Annuity rates are also affected by interest rates. MoneyWeek reported that, as the Bank of England increased the base rate in 2022, annuity rates soared to a 14-year high. It’s important not to let external economic factors affect your decision, though. Instead, decide on the best course of action for you and your personal goals.
2. Pension drawdown offers a flexible way to withdraw your retirement savings
An alternative method of withdrawing your pension money is to use flexible drawdown. This means that you withdraw a lump sum of money from your pension whenever you like, usually leaving the remainder of your pension invested.
This can be a helpful way to manage your income if you don’t think you will need the same amount every year or if you don’t want to commit to an annuity. But there are some important factors to consider before opting for flexible drawdown.
You will need to choose a provider for your drawdown fund, as not all pension providers offer this. It’s important to consider all your options to make sure you select the provider who is right for you.
Another factor to consider is how you would like the remainder of your pension to be invested. It’s important to invest your funds according to your own personal risk profile and circumstances.
This may give your money the potential to grow further without taking unnecessary risks with any money that you may need access to in the short term. It can be helpful to consult with a financial planner to help you make the right decision for your circumstances.
It can be tricky to balance withdrawing enough to live on with ensuring you still have enough saved to last the rest of your life. Since the remainder of your pension will be invested, your retirement savings are exposed to risk, meaning the value of your pot could go down as well as up.
So, it’s crucial to keep a close eye on your investments and to be prepared to adjust the rate at which you are withdrawing from your pension as and when needed.
3. You could buy an annuity and flexibly withdraw the remainder of your pension at a later date
While annuities and flexible drawdown offer two different ways of accessing your pension, they needn’t be mutually exclusive.
You could choose to use some of your pension savings to purchase an annuity and use flexible drawdown for the remainder of your pension funds to top up your income when needed. Alternatively, you could begin your retirement by using flexible drawdown and then purchase an annuity at a later date, since rates tend to be higher for people who are older.
The combination of the two methods could provide peace of mind as well as flexibility.
An important point to consider if you do choose this option is that your retirement income from your pension is usually subject to Income Tax.
So, if you have an annuity and choose to use drawdown to withdraw additional funds, it could push you into a higher tax bracket for that tax year. A financial planner could help you to decide on the most tax-efficient way to withdraw your pension funds and help you to achieve your goals.
Get in touch
If you’d like to learn more about how to withdraw your pension funds in a way that’s suitable for your circumstances, we can help. Email info@informedpensions.com or call 0880 788 0887.
Please note
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.