Access My Pension

We have local offices in Edinburgh, Falkirk, Glasgow, Livingston and Stirling and provide Financial Advice on Pensions throughout Scotland. If you would like to speak to an Independent Financial Adviser (IFA) then book your free initial consultation.

1. What type of pension do I have?

A pension is a product that allows you to build a pot of money for retirement, in a tax-efficient environment.

There are two distinct types of pension:

(a) Final salary (or defined benefit) pension. This is arguably the most generous type of pension scheme; few employers now offer it to new staff, due to the expense of running. They normally pay a lump sum and an income that rises every year-as people are living longer and some funds have performed poorly employers are faced with potentially huge bills to plug the deficit.

There are two common types of defined benefit pensions:

(i) Final salary schemes are based on your salary on retirement.

(ii) Career average schemes are based on a salary average throughout your career.

Pension tip: Be very cautious if someone tells you to move a defined benefit pension to a defined contribution scheme, since this is unlikely to be in your best interests.

(b) Money purchase (or defined contribution) pension. This type of pension allows you to build a pot of money for retirement, but unlike a final salary pension, there is no guarantee on what level of income you will receive.

The investment risk lies with you – if the funds perform well, you’ll have a larger pot in retirement. If the funds perform poorly, you’ll have a smaller pot in retirement.

When accessing, you can usually take up to 25 per cent as a tax free pension commencement lump sum and the remaining 75 per cent is taxed as earned income. With a money purchase scheme, you have two options when it comes to taking your pension, as discussed below.

2. What are the options for accessing my pension funds?

(a) Buy an annuity.

An annuity is a product that turns your pension pot into a guaranteed income for life. There are three main types of annuities:

(i) A level annuity, where the payments stay the same every year.

(ii) An escalating annuity, where payments go up every year

(iii) An investment-linked annuity, where payments can go up or down every year depending on how the investment has performed. These tend to have a ‘secure level’, an amount which your income will never drop below.

As at April 2023, a 65-year old purchasing an annuity on a level basis would need to live just over 14 years to recoup the purchase price (quote based on £150,000 purchase price, no health issues, single life, no guarantee and paid monthly in advance. Quote generated 19/04/23). Many annuities are also inflexible, so they may not match your needs if your circumstances change in future. However, many people still buy annuities for peace of mind; they pay you an income every year for as long as you live.

(b) Take money directly from your pension fund.

You can decide to take the whole pot in one go, or draw a steady income as required. With most pensions invested in the financial markets, the latter option offers potential to benefit from any fund growth. However, you could lose out if the value drops during your retirement.

Most people will want to draw a sustainable income throughout the rest of their lives. It’s vital that the funds you invest in match your attitude to risk, and get reviewed regularly. Many new retirees decide to move their money into more cautious investments, to protect the money they’ve accumulated.

Pension tip: Pension liberation schemes claim to release funds for people before they reach 55, but these schemes normally charge very high fees, can lead to huge tax bills and place your money in unregulated high-risk investments. In some situations, the liberator will steal your entire pension fund, leaving you with just a tax bill!

3. Can I access my pension now?

The retirement age is set at 55 by the Government, but you may be able to retire earlier if you are in poor health or have a contractual retirement age. This will increase to 57 on the 6^th April 2028.

4. What’s my monthly income going to be?

If you are taking money directly from your pension fund, you can take as much or as little as you wish. The risk is that the pension fund may not last throughout your retirement. For instance, paying yourself £25,000 per year from a £100,000 fund, it is likely the income will only be sustainable for four years.

If you are buying an annuity, your income will depend on:
(a) Your fund value.

(b) The amount of lump sum taken.

(c) Annuity options selected.

(d) In some cases, your health and postcode.

Pension tip: As a rough rule of thumb, you should aim to have a pension pot twenty times as large as the income you want in retirement.

5. Can I take my pension and continue to work?

There is no obligation to stop working just because you’re taking your pension. If your company contributes to your pension and you access it, however, their contributions will probably stop. You could be losing a valuable benefit in this instance, which is important if you’re considering early retirement. Also be aware that receiving both employment income and pension income could push you into the higher or additional rate tax brackets.

6. What tax will I pay?

You can usually take up to 25 per cent of the value of your pension as a tax-free Pension Commencement Lump Sum. The rest won’t be subject to National Insurance but it will currently be taxed through PAYE. In Scotland, this may be at 0, 19, 20, 21, 42 or 47 per cent. As with all tax matters, there are many pitfalls to avoid in this complex area…

Illustration: John Smith is still working, earns £34,000 per year and is a intermediate rate taxpayer. He has a £50,000 pension and decides to cash this in. He receives a £12,500 tax free pension commencement lump sum as expected, but then discovers his tax bill on the remaining amount is £13,720.98.

John hadn’t realised that taking the pension as a lump would push him into the higher tax bracket. If he’d taken the lump sum and then split the remaining amount over four years he would have only paid £7,875 in tax – saving him over £5,848.98!

This is just one example of how careful tax planning can help drastically improve your quality of life in retirement.

7. What happens when I die?

Pension holders who elect to take an annuity can choose from one of the following options:

(a) It stops on death.

(b) It continues to pay a spouse or loved one an income.

(c) It pays a lump sum.

If you choose (b) or (c), this will reduce the annual income you receive. For those who elect to take money directly from their pension fund, the money left after you die can be taken as a lump sum (or as income) by a spouse or loved one.

Pension tip: Most pension funds are set up under trust, and the recipients are decided by the scheme trustees and not by your Will. For this reason, it’s important to nominate beneficiaries when setting up a pension, so the trustees know who you wish to get the money.

8. Should I consult an adviser?

To access your pension, you will almost definitely need to consult a financial adviser. When accessing your pension, you’ll be making decisions that will affect not only the rest of your life, but also any funds left behind for your family. This is an increasingly complex area, but a good financial adviser will be able to offer expert advice. For instance, they can set up your preferred pension plan on your behalf. They can also offer practical advice to help maximise retirement income, while minimising your tax liabilities.

9. What will an adviser do for me?

A regulated and qualified financial adviser will do the following:

(a) Review your income, expenditure, tax status, objectives and appetite for risk.

(b) Liaise on your behalf with existing pension providers.

(c) Identify the most suitable pension products and compare charges.

(d) Research and recommend an investment strategy (if applicable).

(e) Build a financial plan to help you reach your income goals.

(f) Guide you through the process of accessing your pension.

(g) Complete an annual review.

10. How much will this advice cost?

At Select Wealth Managers, we will clearly explain the cost of our advice. After a free initial consultation, we should have gathered enough information to give you a definitive price for the work we will carry out. However, you won’t be under any obligation to proceed. Read more about Financial Adviser charges.

Pension tip: Did you know that all financial advisers in the UK are now legally obligated to outline the cost of their advice in clear, unambiguous terms? Make sure you understand any costs involved, before signing up with a new provider.

The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested.

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.