None of us are getting any younger, so it’s probably a good idea that we all start paying into a pension scheme before it’s too late. That said, many people are reaching retirement age very soon, and those who’ve been paying into schemes all their lives will promptly be asked to make a rather life changing decision within the next year or two.
Most pension schemes will ensure the individual receives a weekly or monthly cash payment for the rest of their lives, so this isn’t something soon-to-be OAP’s need to worry about. However, providers usually offer an annuity option, and this can be where some people make their biggest mistakes.
So, if you’re currently approaching retirement age, and you’re a little unsure as to how this annuity thing works, take a quick read through the rest of this article and i’ll do my best to explain it all as simply as possible.
What Is An Annuity?
Basically, this is a lump sum that can be paid to an insurance company upon you reaching retirement age. It protects you against living too long and ensures you receive a weekly or monthly payment for the rest of your life, regardless of how much you have in your pension scheme. Usually it can range from 10% to 60% of your entire pension pot. Now, although the decision to receive this payment is generally up to the individual, you really need to research before buying an annuity, as the best choice will depend upon your current situation.
Why Do People Take A Personal Lump Sum From Their Pension?
This can be for a variety of reasons. Perhaps the individual still has a few thousand pounds to pay off their mortgage, or maybe they’ve promised themselves a quality round-the-world cruise when they reach 68. Whatever the reason, you’re allowed to take up to 25% for yourself and some people just find the money comes in handy.
However, if you’ve already got extensive savings, there really is no need to take a lump sum and purchasing an annuity could be a far better option, as there’s nothing stopping you from paying for anything you need – and it will also mean your pension payments stay as secure as possible.
Do I Have To Pay Tax On A Lump Sum Payment?
No, you do not, and this is why so many people consider them to be a very good idea. Presuming you buy a rather attractive annuity, you’ll end up paying tax on each of your monthly payments, yet this can be vastly reduced if you accept a 25% lump sum. That said; some people in the UK have pensions payments that equal far less than the current tax threshold, so it really is something you need to assess and work through yourself.
Well, there you have it my friends. I hope now you’re a little more in the know when it comes to your pension options.
Good luck with everything, whatever you decide to do.