Accessing your pension savings at age 55 offers several possibilities, each with its own advantages and disadvantages. The best choice depends entirely on your individual situation, and seeking professional financial advice is highly recommended before making any decisions.
Transferring Your Pension to another provider
You have the flexibility to transfer your pension to another provider at any age. The new provider typically handles the transfer process, communicating directly with Jarvis.
Withdrawing Your Entire Pension Pot
You can withdraw your entire pension savings as a single lump sum.
Tax Implications: Tax may be due depending on the total amount. Typically, the first 25% is tax-free, while the remaining 75% is taxed at your marginal income tax rate. This could push you into a higher tax bracket. Emergency tax might be deducted, but you can usually reclaim it from HMRC.
Annual Allowance: This triggers the Money Purchase Annual Allowance (MPAA), reducing your annual pension contribution limit from £60,000 to £10,000. The MPAA is not triggered if your pot is £10,000 or less and you withdraw under the 'small pot' rules.
Withdrawing Smaller Lump Sums
You can withdraw smaller amounts of cash as needed, leaving the remaining balance invested.
Because the remaining funds stay invested, they have the potential to grow, but their value can also decrease.
Tax Implications: Usually, 25% of each withdrawal is tax-free, and the rest is taxed at your marginal rate.
Annual Allowance: The first withdrawal triggers the MPAA, lowering your annual contribution limit to £10,000.
Tax-Free Lump Sum and Gradual Withdrawals
You can withdraw up to 25% of your pension tax-free. The remaining amount stays invested, and you can access it as regular income or occasional lump sums.
This allows for potential growth of the remaining funds, but also carries the risk of losses. Over-withdrawing or poor fund performance could deplete your retirement savings.
Tax Implications: The initial 25% is tax-free. All future withdrawals are taxed at your marginal income tax rate.
Annual Allowance: The initial lump sum does not trigger the MPAA, but subsequent withdrawals through FAD do, reducing your contribution limit to £10,000.
Purchasing an Annuity
Usually, the 25% tax-free lump sum is taken, and the rest is used to buy an annuity. This provides a guaranteed income, either for a set period or for life.
Annuity rates are influenced by factors like interest rates, life expectancy, and the specific annuity type. Enhanced rates may be available for those with health issues or certain lifestyle factors.
Jarvis does not directly offer annuities, but you can withdraw your tax-free portion, and Jarvis can transfer the rest to your chosen annuity provider.
Tax Implications: The 25% lump sum is tax-free. Annuity payments are subject to income tax.
Annual Allowance: Annuity income generally does not trigger the MPAA, unless it's an investment-linked or flexible annuity.
Don't worry, you don't have to choose just one option, you can decide to take a custom approach by combining these different options.
Whatever you decide on, we'll guide you through the process!