Cashing in your pension? Beware of these retirement pitfalls

Also check to see if the terms and conditions restrict the type of annuity you can take. The guaranteed annuity rate might just provide you with a level, non-increasing income for you only which ceases on your death. If you want to provide a continuing income for your spouse or partner, and/or include annual increases, find out if the guaranteed annuity rate applies, or whether the rate would be lower. 

If the annuity doesn’t provide the type of benefits which suit your personal circumstances, you may wish to compare it to other annuity options on the market to see if you can get a more suitable deal. 

A word of warning, if you decide to transfer your benefits elsewhere, for example to another annuity provider or go into drawdown, you will lose the guarantee. 

Taking tax free cash sums from other pension savings 

Starting annuity payments, including ones with guaranteed annuity rates, will not stop you from taking a 25pc tax-free lump sum from your other pensions. This is provided that your total benefits don’t exceed your lifetime allowance. Based on the standard lifetime allowance of £1,073,100, the maximum tax-free lump sum is £268,275. 

The lifetime allowance is a limit on the value of benefits that can be paid to an individual from registered pension schemes, as a lump sum or income, without triggering an extra tax charge.

There are a number of ways you can take your other pension benefits. You can usually take up to 25pc of your fund as a tax-free lump sum with the remainder going to buy an annuity or into drawdown. Any funds in drawdown remain invested and you can take withdrawals as and when you like or leave the funds untouched. Income from your annuity or drawdown plan is taxed at your highest marginal rate of tax.

Or you can cash in your pension as a lump sum, or as a series of lump sums, if your pension provider offers this option. This is rather inelegantly known as an uncrystallised funds pension lump sum. Here, every time you take out a lump sum, usually 25pc is tax free with the balance taxed at your marginal rate of tax, just like drawdown or annuity income. 

As you are past the normal minimum pension age, currently age 55, providing there are no guarantees attached to your other pensions, it will be totally up to you when and how you access these pensions, subject to scheme rules. If you are in any doubt, I suggest you contact your pension provider of each of your other pension arrangements to find out what your options are. You may wish to seek guidance from your pension provider, Pensions Wise or advice from a financial adviser.

Pensions doctor Kate Smith, of pension firm Aegon, solves your retirement issues. Write to Kate with your pension problem via Columns are published twice a month on Tuesday mornings

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