So you’ve done your 40 years of graft in uniform and reached the magical 55 years of age. As if having an annual pension of let’s say £40K (and a lump sum of £120,000) wasn’t tasty enough, the even better news is that you can now grab your entire pension pot should you wish to. Suddenly, that speedboat is within reach – without having to go on Bullseye to win it!
Hold on though, before you get a bit ‘Brewster’s Millions’ – there are a few things you should keep in mind. Yes, last year the Chancellor changed the way in which pensions can be handled. Instead of having to buy an annuity (a product that guarantees a certain amount of income per year for the rest of your life), he made amendments that give people access to their entire pension pot – well, sort of.
The basics are that once you reach the age of 55 you’ll be able to take out 25% of your pension savings as a tax-free lump sum and access the rest when you need it (whilst paying income tax as you withdraw it). Smart cookies would probably choose not to take the rest immediately since to do so would put them into a 40% tax band – unless they needed fast cash to buy that dodgy looking painting in the antiques shop that they had a hunch was an undiscovered Picasso or they had a dead cert in 3.15 at Doncaster!* (If you really want to, slightly better advice might be to withdraw near to the 40% band each year until you’d cleaned it all out.)
Free to Spend
Assuming you can handle the freedom and are not likely to be tempted into excessive spending, the new laws could be very useful to you. Sensible usage might be to eradicate expensive loans, credit card debt or mortgages before looking at investing the rest in say, property or yes, perhaps a spanking new sports car.
The good news is that if you invest wisely, your income (or capital growth) might well outstrip that from a traditional annuity. The bad news is that if you spend wildly, you’ll have zilch for the rest of your life and that Fortnum & Mason’s hamper you splashed out on for lunch might just have to last you for 30 years or more.
In short, it’s a tricky decision. The two stark outcomes are to spend too quickly, leaving yourself short later on or arguably worse yet, to be stymied by over caution and not enjoy the full benefit of your savings.
*This article does not constitute expert advice. The publisher of Civvy Street will accept no responsibility or liability for any decisions readers choose to take after reading this article. For goodness sake, consult a qualified pensions expert before choosing to spend or invest.