How Much Can I Take From My Pension?

Reddington02/12/2020

…or should that be ‘How Much Should I Take From My Pension’?

This is another one of those, ‘how long is a piece of string’ topics.
There is definitely no one-size-fits-all approach, because we are all different, and so are the lifestyles we want.

Let’s be clear on a few basics…

Depending on the type of pension you have, the earliest you are likely to be able to access your pension at all is currently 55. This will almost certainly increase as we are living longer. With some pensions it may well be later than that, and in a few specific cases, before. So before even thinking about how much you can take, check what age you can access your pension savings.

Some pensions provide access with far more flexibility. Where this is possible, they are known as ‘Defined Contribution‘ pensions. Other arrangements are designed to provide a guaranteed income which increases over time, until death. These you might know as either a ‘Defined Benefit‘ pension or ‘Final Salary‘ pension.

For simplicity’s sake, we will stick to DC pensions. Because it has an investment linked value (which your pension provider should provide at least annually), and means in most instances you are able to choose how much you take. Plus, they are far more common now than DB schemes.

elderly man checking pension pot

Here are four things which you should be thinking seriously about, when considering what to take from your pension:

Do you need your pension?

Some clients are sufficiently well off and do not actually need to rely on any income from their pension. That could be because of a business sale, a sufficient investment portfolio or a family inheritance. You on the other hand may see your pension as there to be spent in retirement.

However, whether you take cash from other assets, or your pension, it’s still your money to access, to fund your lifestyle.

Following the introduction of pensions flexibility in 2015, pensions can now also be used as an inheritance tax planning vehicle. They have the ability to cascade money down across generations without triggering inheritance tax liabilities.

So is this the case for you?
Do you actually have sufficient assets to fund your retirement, apart from your pension?
Then maybe you shouldn’t touch your pension at all right now?! Crazy, we know…

Don’t forget the tax!

Note that with the majority of DC pensions, most people can take 25% of the pension fund tax free, subject to the LTA (Lifetime Allowance) which is currently £1.073m. That remaining 75% (also within the LTA) will be subject to tax as and when you draw the income out.

You might have saved a significant amount of money in your pension. Let’s say you took £200,000 (after your 25% tax free has been taken) in one go. You just couldn’t help yourself and wanted to buy a car amongst other things. That big withdrawal means you would pay a significant amount of income tax in the process. With the top rate payable at 46%!* Yikes!

So remember that the temptation to raid the pension piggy bank comes at a price – don’t forget the tax!

How long do you need your pension to last?

Consider what if your pension is your only source of income available to you (other than your state pension) to maintain your lifestyle when you stop working? You should ask yourself how long your pension needs to last, as well managing taxation.
You may need your pension(s) to continue funding your life over 25+ years. This is possible if you are fit and active. In this case, you will need to plan carefully. And take an amount which can sustain you over that period, without it running out!

You’ll need to think ahead of time what life after work looks like for you.
Are there any big costs to consider? Helping children with weddings or buying their first property, for example.
Once you understand these numbers, you can then begin to map out how your pension(s) will need to support this, or if they can. Because there is certainly no guarantee they will.
If it looks questionable whether it can, you need to give careful thought to realistic factors like your life expectancy, potential investment growth and increasing costs of living etc.
This will act as a guide to what amount you can safely draw out on an ongoing basis.

Don’t forget other assets and income!

You’d be surprised how often clients forget that they have other sources of income available to them.
We seem to have a habit of assuming our pensions need to be accessed first when we stop earning, before considering all our options.
Don’t forget other sources of income when calculating what you need to spend and where the money is going to come from.
This might include:

cash savings
premium bonds
an investment portfolio/stocks and shares
rental income

…and lastly, don’t forget your State Pension….this currently equates to £9,339.20 a year, per person.
Sometimes, being in a couple does pay(!)

Consolidating this income will help you see the full picture, what your pension needs are to sustain you, and help you plan properly.

Thinking through these points, you should be able to start to see where your pension fits in, and how to view it.
But this is individual to you, so although it would be easier to have a one size fits all, there isn’t one!
The better you are to organise yourself and discuss your future plans (without making it boring), the more reassured and in control you will feel.

(And don’t forget to check out our other article on pensions here)

*2020/21 Scottish Income Tax Rates