You can get an income from your pension pot that’s adjustable. This means you get a regular income but can change it or take cash sums if you need to.
● You get 25% of your pot as a single, tax-free cash sum
● The other 75% is invested to give you a regular but taxable income
● You can adjust, to suit your specific needs, the income you take and when you take it
This option is also known as ‘flexi-access drawdown’.
You will need to be involved in choosing and managing your investments, which is why previous investment experience would be beneficial. The value of your pot can go up or down.
As not all pension providers offer this option, you can transfer your pot to another provider but you will probably have to pay a fee.
Taxation
The income you get from the investment is taxable. Your provider will pay you the income net of tax.
You pay tax when you take money from your pot. This is because when you’re paying into your pension you get tax relief on your contributions.
Example
You have a pot of £100,000 and take a tax-free lump sum of £25,000. This leaves you with £75,000 to invest. You get an income of £3,750 a year from your investment. If you pay 20% tax you’ll get £3,000.
If you take the 25% tax-free lump sum, you must get an adjustable income with the rest or use one of the other options .
You can move your pot gradually – you don’t have to move it all at once. Each time you move a sum, 25% is tax free.
If you choose this option, you can leave your money to someone when you die but they may have to pay tax on it, depending on a number of factors.
How adjustable income works
Different investments have different risks. You pick the investments that match your attitude to risk and get a retirement income from them. You need to think about how much you take out every year and how long your money needs to last .
A financial adviser can help you create an investment plan for your money. They can advise you on how much you can take out to make the money last as long as possible. They’ll charge you a fee for this.
Your provider is likely to charge you fees for managing your investments and whenever you get a payment.
If your provider collapses you’ll be covered by the Financial Services Compensation Scheme .
Continue to pay in
If you have more than one pension pot, you can take an adjustable income from one and continue to pay into others. However, you may have to pay tax on contributions over £4,000 a year (known as the ‘money purchase annual allowance’ (MPAA) ).
This includes your tax relief of 20%. For example, to get a contribution of £3,000 you would only have to pay in £2,400.
You may still be able to pay into the pot you take your adjustable income from but you won’t get tax relief on these payments.
Financial advice
If you’re interested in this option you might want to get financial advice first. A financial adviser can help you to compare adjustable income products and work out which is best for you.
Scams
Beware of pension scams contacting you unexpectedly about an investment or business opportunity that you’ve not spoken to them about before. You could lose all your money and face tax of up to 55% and extra fees. Please see out blog on scams.