It has always been possible to take 25% of your pension pot as a tax-free lump sum but now everybody can take the remaining 75% of their pension pot as a cash sum, but it will be taxed at your marginal rate. All cash sums (in excess to the 25% tax free amount) will be taxed as income at your marginal rate. This means if you take a large cash sum you could end up paying higher rate tax.
Since pension freedoms where introduced in 2015 you can decide when to take income or cash from your pension pot at any time after age 55. After taking 25% of your pension pot tax-free you can choose between any of the following options:
An Annuity is a financial policy that guarantees to pay a secure income for the rest of your life, no matter how long that is.
When you purchase an annuity you convert your pension pot into a stream of future income for the rest of your life.
A traditional annuity pays a guaranteed income for life and it is possible to get a higher income if you smoke or have a medical condition.
With pension drawdown you can take regular or ad hoc income payments directly from your pension pot. This means you keep control over your pension pot and have the flexibility to spend and invest your pension pot as you want.
After your death, any remaining money in your pension pot can be left to your family.
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If you want to make the most of pension freedoms you should start planning ahead and make sure your financial affairs are in good shape in the years running up to retirement.William Burrows
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