Your Pension Pot

Thankfully the metrics behind ascertaining how much your pension is worth is far better than just guessing.


Teams and scores of people are managing your investment funds over the years, using the very latest technology to understand rises in minerals and betting on company news and development.


No, the money derived from your pension pot did not get so big from just sitting in a bank account doing nothing. In actual fake it’s probably been around the world several times over.


So how much is a pension pot worth? It’s not a catch all amount.


Your pension pot final total will depend on the age you started paying contributions, how long the fund has been running, how well it performed and whether you topped it up or not along the way.


You will need to write to your pension manager to find out the nearest estimated total, as an annual statement will not reveal enough information.


How Much… Will My Pension Income Be?

Asking how much your pension income will be is an entirely different query. As of 2015 you could take 25% tax free on your final amount, with the remaining 75 taxed. That percentage will be taxed no matter whether it’s a Monday or Friday. 

A financial advisor can help you ascertain how to best invest that money so that you can increase your pension income, either as a guaranteed payment ad with an annuity or as a flexible option with investment funds and SIPPs.

You can even throw it all back in and start again for another ten years, 55 is too early is it? Still working?

A pension pot calculator is a very nifty online tool that helps you gauge on the fly what your chosen options might be worth to you in the years to come. 


It’s always best to compare pension income options rather than simply take the cash and run, or at least walk away quite fast.


How much of my pension pot can I access straight away?


The aspect about a pension that you should understand at the start, is all those contributions you made over the years were probably tax free.


Meaning that when it comes to accessing the pot at the end of the pension plan rainbow, a certain amount will be taxed by the government.


You are granted 25% tax free and that’s the last gift the government allows (as of early 2018).


It is of course very tempting to take all of the cash – you can withdraw 100% from day one with a bit of notice. The amount could be more than £250,000, much more, it could be less. However, spread over 20 years, if you cash out at age 55, that’s only £12,500 a year.


Quite, your state pension will arrive after you are 65’ish but you may still have another 30 years to fund a lifestyle for yourself. It’s worth acknowledging that pushing the pension pot cash into an annuity that pays you a guaranteed lump sum or flexible amount for the rest of your life is actually free of tax (barring any fees) to set up.


So rather than drawing down on the entire amount and taking it as cash, with 25% tax free and paying tax on the remaining 75%, you could have an annuity / allowable investment fund and the tax would only come off the income received on a monthly basis.


With an external investment tax that could be two fold as Capital Gains tax may apply on share and trust payouts. You can take the cash in smaller chunks but the same tax issues apply. 25% tax free and 75% taxed.


The 25% amount does not affect your annual Personal Allowance amount. Always talk to an independent financial advisor as statistics show people that do, benefit the most.


The above information pertains to privately held pensions and information may change in the near future to keep step with the ten year gap between private and state pensions, so age may rise to 57 before you can cash in.


The above is not related to state pension drawdown as that is the same age for everyone instead Money purchase pension plan or SIPPs, both males and females and has recently been pushed up to age 67 between 2026 and 2028.


Guaranteed Income


The phrase pension plan can be a little untimely. 


To arrange a pension plan and believe the payments towards one is the plan outright would be missing the whole point. In my view a plan would involve what you do with the income from the pension pot when it comes to paying out. 


You will have a variety of options, one of which is a guaranteed income for the rest of your life, no matter if that’s ten years or one hundred years (unlikely at the moment).To receive your pension in the ‘normal’ fashion, you would buy an annuity when the pension pot becomes available. 


While you may still take up to 25% in cash tax free, the remaining 75% can go into an annuity that helps exchange the lump sum into monthly payments for the rest of your life. There may be an arrangement fee but other than that, no tax is paid on the transfer. 


The only tax you pay is on the income you receive thereafter.Even with an annuity there are further options to protect the source of income from completely disappearing in the event of your death or should you become ill. This may make the purchase of an annuity a little more expensive or reduce monthly payments. 


These options involve leaving a share of your pension to a spouse or receiving an enhanced payment if you get diagnosed with an illness. The latter may boost payments up to 50%.For decades, if employed by someone else, you have perhaps been far too used to getting the same regular payments each month. Not being used to living on an uneven income. 


This is a normality you may wish to stick to. However once you buy an annuity, that’s it, your cash is in for life, the rest of yours. So please do ensure you compare annuity plans before you purchase and ensure you receive the best annuity advice possible.


Flexible Income


For years we grew up listening to credit card companies telling us we should have a flexible friend, hopefully a responsible one. 


Why should we not remain flexible in our twilight years? When we talk about drawing down on a pension, this is thee drawdown pension. 


As over time you can draw on payments to any value you wish. So if you wish to have a more flexible pension the option contained in this mode of investment are yours to choose.


Once you receive your notice on how much your pension pot will realise, you can start to put the rest of your pension plan in action. you could opt for 25% tax free still, but instead of purchasing a sole annuity with the remaining 75%, you could buy into a SIPPs package or buy both an annuity and into a Self-Invested Personal Pension. 


You are free to choose, of course the bigger your pot the more options you have to spread risk and income about. Both regular and flexible. But what is the benefit of a flexible pension? Well that depends on who is running it. 


The basic aim is to invest part of your pension into a single investment fund or trust who will then manage the possible profit on your behalf. Then o certain calendar days you will be informed of the profit and how much you may take out, on top of any normal payments expected. 


Thus, if you make money on your investment it’s pretty much an instant withdrawal, while keeping the rest in to work for you.There exists the ability however to withdraw more than your investment earns, meaning your pension pot decreases. 


Which is why some take the 255 tax free cash lump sum, invest in an annuity and get serious with the rest as an investment so as to perhaps receive more money than expected. There are fees, especially if a fund is giving you advice but you can also run these portfolios entirely by yourself – not always advisable.


The good thing is because you expend more of your money, the perks are usually better. In some cases if you die before the age of 75 you can name a beneficiary who will receive the remainder of your pension in full. 


As opposed to an annuity who may only allow you to name a partner to receive further monthly payments. This goes to show, in a small way, how flexible a pension investment can be as opposed to a more fixed guaranteed income from an annuity.


Why You May Not Want To Take Your Pension Yet…


There are some instances where you may not want your pension as cash yet. 


Why will be a personal reason but it could be temptation, you’re still working, fund underperformed or fund did well but you’d like more and don’t need the money right now. 


There are many reasons why you may wish to leave your pension pot alone. That doesn’t mean it need sit in a normal bank account however.Ages for access differ across pension plans, as does the level of permission. For the old style Final Salary Pension Scheme you actually need a financial advisor to suggest if you should take it early or not. 


These are now termed defined benefits schemes. They may also recommend what to do with it if you take it, reinvest. Accepting your pension pot as cash is not the same as taking it and spending.


Age 55, unless changed by government, is the usual age you are allowed to withdraw your private pension pot. If you do, you may still close down that pension but move the funds to another for an additional ten or fifteen years. If you happen to have multiple pensions in-running, you could even consolidate them or leave them with your current fund or company to be withdrawn at a alter date.


This information pertains to private and company pension schemes, your state pension is only accessible when you reach the statutory pension age. You do not need to take the pension pot when it is due, simply reinvest or take some and move the rest to another pension plan until too old to have that option.


What To Do Next?


We cannot all be blessed with the knowledge of an accountant or stock market trader, which is pretty much how clever you would need to be to make the best choices on pension schemes and investment funds. 


Which is why many of us consult the next best thing and financial advisors to discuss our pension options.Finding the best pension to invest in comes with recommendations far and wide, most notably the performance and annual statement updates. 


One of the surest ways to begin your learning curve would be the government’s Pension Wise portal. Many people only have one pension, some non but the earlier you get set up, the more akin you will be to that amount being deducted each month.


It’s a thought that can fly out the window the minute you think about “I should get a pension set up!” In another ten years you can find yourself repeating the same sentence. Meanwhile you lost £xxxx a year through delaying a pension income plan. A financial advisor can help you understand your current finances and income and help you find out if you have any spare to contribute, even if it’s a small amount.


For instance would you miss that doughnut a week and do you really need that over priced burger at the football stadium?


That could be going towards your pension. Talking with a professional comes with no obligations and you may walk away knowing a lot more than you do now. What can an independent financial advisor help you with?


  • Should you already have a pension pot to claim, they can help you differentiate between guaranteed and flexible income options.

  • Using the same pension pot they help you understand the 25% tax free sum, 75% tax and how you can split it between more cash / flexible investment funds / guaranteed annuities and advise on the benefits and pitfalls of each.

  • They help on tax issues and what to do if with to defer payments

  • Even assist in turning your pension into investing into your children’s very own pension plan

An independent financial advisor, even one working for a company has to present the whole market and not just themselves. Equally any decision you make to start a pension, cash out a pension pot or reinvest for further pensionable income, is entirely yours.