Pension payments are the process whereby a pension pays out from the fund you have accumulated to you through one of the main methods of taking benefits from your pension such as a tax free lump sum, annuity payments or drawdown.
Each of these has varying limits and rules on how they work and what you can do with them in terms of pension payments and are explained below.
Tax Free Cash Lump Sum Pension Payments
When you reach the age of 55 you may at any time take 25% of your fund as a tax free cash lump sum. Once you have taken the full tax free cash your pension is considered crystallised and you may not take any further tax free cash from it unless you make further contributions to your fund.
Although this is pension payments in terms of annual income, the 25% tax free cash is a payment in that it is paid directly to you and you are free to use it however you wish.
You may even take the 25% at stages and not all at once meaning you may if you desire create your own type of pension payments from it by taking small bits at a time such as 5% a year for 5 years until you require further income.
Pension Payments: Annuity
Annuity contracts are the traditional way for pension payments to be made but since the budget report this year are now no longer required by law to be taken by the latest date of 75 and you may instead receive your pension payments in one of many other forms.
In essence, pension payments in annuity is a contract between you and an insurance company whereby you sell your pension fund to them in exchange for series of set pension payments from them.
The pension payments you receive from an annuity will depend on the annuity rates you when you take an annuity, the age you take an annuity at, the size of your fund to name a few. For a full list it is appropriate that you inquire from a suitable independent financial adviser and seek their advice on your retirement options and what pension payments you may be able to receive.
Pension Payments: Drawdown
Drawdown can be split into either capped or flexible drawdown when you are looking to take your pension payments. To take flexible drawdown you will require an annual income of over £20,000 from your relevant income and as such you should contact a financial adviser to see if you qualify for it.
However, most people will only qualify for capped drawdown which limits the amount of pension payments you can take from your pension fund to 100% of the appropriate GAD limit at that time.
With the removal of the need to buy an annuity by the age of 75 this option has proved a viable alternative for those who do not wish to sell their pension to an insurance company and instead prefer to keep it in their own pension fund whereby they can receive direct pension payments.
There are of course risks with drawdown of pension payments such as the possibility that you may use up all of your fund before you retire which is not possible with an annuity but it is not without its positives.
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Pension release allows you to access money you have saved for your pension before you retire, or before the full term of your pension is up. It doesn't matter if you have a private or company pension, if you are over 55 and have over £8,000 in your pension fund, pension release may be possible for you.
Up until recently pension release could be taken by anyone from the age of 50, but with the ageing British population placing a strain on the pension market and National Insurance Contributions barely managing to meet the demand of the State Pension, the Government decided to increase the minimum retirement age to 55 meaning that pension release can now only be taken from that age.
But what is Pensions release?
It is the method of releasing a tax free lump sum of up to 25% of your pension to use in manner that you desire, though the FSA do suggest that this only be taken before retirement if you really do need the cash for something you urgently need such as repaying debt so please consider it carefully before proceeding as it may harm your income at retirement.
Once you have released up to the maximum 25% of tax free cash available through pension release you may re-invest the residual fund into a new provider that best suits your needs and circumstances that you may discuss with a qualified financial advisor to receive the best advice possible. However, you may not re-invest the amount with your current provider, taking early pension release involves transferring your pension payments away from your provider in order to take the tax free lump sum.
To take pension release you will need to contact an advisor (as mentioned above) who will then guide you through the process and do the leg work of getting it done for you. You will be shown how much money you can release and how best to use the remaining sum in your pension for an income while taking into account your entire financial situation to ensure you are not unduly disavantaged at retirement.
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You will receive recommendations on how to draw this income (which can be taken as either an annuity or as income drawdown) monthly, quarterly, six monthly, or yearly which can be taken at a later date or immediately should you decide. It is worth noting that there is now no age limit by which you must commence taking an annuity with your pension, so you can decide to take it when you are much older than you are now, if at all.
Please note however that pension release is not for everyone and you should only consider it as a last resort to gain access to the maximum 25% tax free lump sum from your pension. Please ask your advisor for any advice about whether you would be a suitable candidate to take pension release.
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