Options For Using Your Pension Pot-Our Financial Adviser Explains

Options For Using Your Pension Pot

The pension pot typically refers to the collective pension contributions between you and your employer. It’s common with most employed people. If you’re employed, you might see these deductions from your paycheck. There are certain deductions from your salary which are directed to your pension. The ultimate place where these deducted funds go to is your pension pot. It’s a hypothetical pot but it represents all defined pension contributions.

In most countries in the European Union, you’re not allowed access to this pot until you are over the age of 55. This pot was instituted as a means of securing your retirement. It’s an assurance of income when you retire.

Prior to April 2015, the pension pot had a lot of rigidity. Your choice on how and when you could withdraw this money was quite limited. You also had no prerogative on when you could stop saving into it.

Pension pot - Options For Using Your Pension Pot

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After 2015, there were new options that surfaced with regards to the pension pot. They brought an air of flexibility to the pension pot to the delight of many pension contributors. One of the highlights of the new rules was concerning taking your pension. A contributor was now able to postpone the withdrawal of funds from his/her pot until a later date. This would have the implication of increasing the pot due to more accumulated funds over time. It also has the positive implication of reducing taxes accrued and ultimately making the pot tax free. Thus, when it’s time to access the pension pot, there will be more income at your disposal.

Cashing Out

One of the options you have is cashing in your whole pension pot. Yes, this provision is now available. You could decide to cash it out and close down the pension pot. With this option, the initial 25% will be tax-free. Your tax obligation will be only on the residual amount. This option, though, is not recommended since it comes with a lot of risk.

Assuming that you formally retired and have no salary, the pension pot serves as your primary source of income. Withdrawing it could put your retirement into jeopardy. What if you squander the money or ultimately run out of it? It could actually mean that you have nothing to live on. Thus, you should think twice before cashing in your pension. Cashing in your pension is also not tax friendly. The tax obligation is quite high when you compare to other options. In addition, cashing in means that any dependant that was listed won’t be liable to any income. Hence, while cashing in your pension might be one of the options available at present, a caveat is given. Be duly informed before embarking on this option.

Taking Bit By Bit

There’s a provision of taking money when you need and as you need it; albeit in small bits. This provision is now available without any bottlenecks and restrictions. For withdrawals, the initial 25% is usually tax-free. The rest is taxable. You have the option of withdrawing small amounts of cash and leaving a residual amount in the pot to continue growing. This option, however, entails that your pot will not be re-invested into a new fund. Moreover, it does not have an option of including dependents in the event of your demise. Tax implications are more as the residual amount after the first 25% withdrawal is regarded as taxable income and hence is taxed.

Flexi-Access Drawdowns

The aim of flexi-access drawdowns is to use your pension pot to invest in funds or investments that will provide you with regular earnings; hence providing a retirement income. You could take the initial 25% which is tax-free or any amount you allocate as drawdown and re-invest it into a viable investment or fund that will provide this income. This will require active management of your investment so as to maintain the income stream. However, you should know that the income you’ll receive will be dependent on the overall performance of the fund or investment. Again, a caveat is given on the type of investment chosen so as to not lose your funds.


Another option available is an annuity. After you withdraw the first quarter of your pension pot, you could convert the rest to a lifetime annuity. This will mean that you will be paid a certain amount of income for the rest of your life. The amount that you receive as payment will be dependent on the type of annuity chosen. The upside of annuities is that you could also include beneficiaries in the event of your demise.

Lastly, there is a provision where you can mix any of the above-mentioned options. You can combine any of them or use any of them at different time periods. It will all depend on you individually and your objectives.

There are certain determinants that will influence your decision to choose one of the above-mentioned options or a combination of these options. They may include:

  • Dependants. If you have dependants, this will highly influence how you will choose some of the options. You would have the objective of securing their future while also providing for them at the present. Hence, you might consider an annuity and a flexi
  • Age. If you are quite advanced in age, it may not make sense postponing your withdrawal. You might actually consider cashing out or a combination of taking it in small bits and annuities.
  • State of employment. If you have stopped working altogether, you might want to consider an annuity or a flexi-access drawdown
  • Size of your pension pot. If you do not have as much amount of funds in your pot and you still have a salary, you might want to choose the option of leaving your pension pot untouched till later in life.
  • Tolerance to risk. If you are tolerant to risk you might consider options that are highly risky but have significant gains. If you have a risk-averse attitude then you will prefer options with minimal or non-existent risk
  • Future prospects. When your future is promising in a way, specifically with regard to security of your retirement, it might lead you to choose flexible options. However, when your future is bleak you might not want to mess around with highly risky options.

Utilize your pension pot in a way that closely relates to your financial goals and objectives.

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