What, when and how much can I take from my pension?

Sarah Pennells: Hello, I'm Sarah Pennells, and I'm a consumer finance specialist here at Royal London.

Clare Moffat: Hi, I'm Clare Moffat, pensions and legal expert here at Royal London. Today, we're talking about how to take money out of your pension. So, we'll be talking about the rules as to how much tax free cash you can take. We'll be talking about when you can take money out, and also, how you can take that money out, and the different options available.

Sarah Pennells: Now we've had a number of questions submitted in advance, and we're going to answer some of the most popular ones in the next 25 minutes, or so. But we will also leave time at the end to answer some of your questions, so do, please, submit a question via the Slido link if you'd like to ask one. Now having said that, we can't give an answer to your specific question, or if you have a query about a Royal London product. Now it's also just worth reminding everybody that we are recording this webinar, and we'll be sharing a link to it with everyone who registered, and through our newsletter. So, Clare, the title for this webinar is all about taking money out of your pension, but let's go back to the basics, what are we actually talking about here?

Clare Moffat: So, when we talk about taking money out of your pension we're talking about you deciding when you want to take money out, how you want to take it out, perhaps whether you want to take large lump sums, or a regular income. So, we're really talking about defined contribution pensions. Now that's the type of pension that pension providers offer to you individually, or through your workplace scheme. And that's where you have a pot of money which you use after you've stopped working to provide an income in your retirement, but you don't have to wait until you've stopped working. You might take some money out before then. Now there's another type of pension called defined benefit pensions. Now that's the type of pension where there's a promise made to pay you a certain amount for the rest of your life. Now these type of pensions normally start when you stop working. Public sector pensions are the most common type of defined benefit pensions around now. Final salary pensions are one type of defined benefit pension that you might have heard about, but there are others available.

Now when you start taking a defined benefit pension it's almost like you are getting your salary every month, but you'll get less, of course, but what you can't do, is you can't just dip into that if you need a little bit extra, or perhaps you want to take less. And that's why we're concentrating on talking about defined contribution pensions today.

Sarah Pennells: And there's another reason as well. So, in the summer in July, we carried out some research into workplace pensions. Now we had a, a sample size of 6,000 people, and 4,500 of them had a pension. And what they told us was that most of their savings were in defined contribution pension. So, that's another reason why it makes sense to focus on those in today's webinar. But before we start talking through the different ways that you can take money out of your pension, it's time for our first poll. So, please vote using Slido. The, the poll is, 'If you were to take-, thinking now about taking money out of your pension, which of these methods would you use?' So, we'll give you a second, or two to vote.

Clare Moffat: Just watching these. It's still moving around a little bit. People are saying a mix.

Sarah Pennells: Yeah, that's definitely quite popular, isn't it?

Clare Moffat: Yeah, yeah.

Sarah Pennells: Okay.

Clare Moffat: I would say just, just around about a third saying a mix of different options.

Sarah Pennells: So, what we're going to be talking about the different options in the rest of the webinar, but before we talk about those, there can be lots of different terminology, and jargon when it comes to the choices that face you at retirement. And our research also show that many people were quite confused by some of these terms. So, we're gonna start by explaining some of those those. So, the first term is, 'Tax free cash.' Now one in five of people we, we researched said they'd never heard of this phrase, and one in four said they weren't quite sure what it meant. So, let's explain it. With defined contribution pensions you can take up to 25% of your pension, or pension pots if you have more than one, as tax free cash. Now what that means is it doesn't matter how much income you have, or what your sources of income are, with the tax free cash that money is not liable to any tax.

Clare Moffat: Now, Sarah, we've had a question from Amanda, and she has asked can she take her tax free cash at any time, or does she has to-, does she have to work until she's stopped working? So, what is the answer?

Sarah Pennells: Well, it's a really good question, and there are lots of myths around taking money out of your pension. And one is that with defined contribution pensions you have to be retired before you can take any money out. Now that's not the case. You can maybe take a bit of tax free cash out while you're still working to give you some extra income, or maybe you want to fill in that, sort of, gap between working part-time and getting your state pension. So, there is that flexibility. However, there is a rule that says you have to be aged 55 or over before you can take any money out of your defined contribution pension. Now that age, that minimum age, is rising to 57 in April 2028. Having said that, there are some limited circumstances where you can take money out of your pension before you're 55. Now that's normally because a situation where you're ill, and unable to work, or if you are serious ill, and have very limited life expectancy. The other example is if you're working in the kind of profession where there's an earlier retirement age.

Okay, let's go for our second poll. A little bit of a test here. 'What do the rules say, if you want to take tax free cash out of your pension, do the rules say that you have to take this as one tax free cash lump sum, or do they let you take out several tax free cash payments?' So, please, vote. I'm saying it's a test, but there's no prize for getting the right answer, but no sitting on naughty step if you get the wrong answer. So, what's everyone saying? Okay, several lump sums. So, 61% currently saying several lump sums. So, great, you would've all got the prize. That is correct. You can take your tax free cash. You know, we often talk about it as being tax free cash lump sum, and, kind of, implies it's one wodge of money, but that's not what the rules say. You can take it as several payments. And that leads neatly onto a question from Fatah who wanted to know, 'Is it better to take tax free cash as one lump sum, or several payments?' And the answer is it depends, and I think, in particular, what you want the money for. So, you might, as I mentioned earlier on, want to use the tax free cash to give you this tax free income maybe to top-up while you're working part-time. Or perhaps you have a series of planned expenses, and in which case taking your tax free cash in stages would make sense.

If you are going to take the whole amount of tax free cash out in one go, then frankly, being, being a bit gloomy for a minute, it is worth bearing in mind that if you were to-, that-, put that money into a savings accounts, and you were to sadly die, then depending on the value of your other assets, so things like your home, and any investments you have, that money from your pension could then be liable to inheritance tax. There is something else that's also worth mentioning. Now it used to be the case that you had to take your tax free cash from your pension before your 75th birthday. Now that legal rule doesn't exist anymore, but many people do do this, and there's a whole range of reasons why they might do that. But one is that the tax rules change in terms of if you were to die when you were aged 75 or over, and leave some pension money behind, then the rules change on how much tax those people who benefit from your pension would pay if you were to die either aged 75, or over. And we did cover what happens to your pension when you die, and other issues around wills, and power of attorney, and things like that, in a webinar earlier on this year, and there's a link to that on royallondon.com.

Now, Clare, if you want to take your tax free cash as a-, out as a series of payments, is that something that all pension providers offer, and do you just fill in a form, or is it more complicated than that?

Clare Moffat: Well, as is a lot of things to do with pensions, the answer is it depends. So, most pension providers, and pension schemes, will offer this, but if it's an older type of pension scheme it might not be possible in the scheme it's in, and what would happen is that you would have to move to a newer type of pension if you want the full range of pension benefits. Now if you aren't sure the best thing to do is to talk to your adviser if you have one, or talk to your pension scheme, or pension company.

Sarah Pennells: Now before we leave the topic of tax fee cash, I've been talking about the fact there's this 25% limit, but there are a couple of exceptions here. Now it's not going to affect many people, but it could affect some, so talk us through that.

Clare Moffat: That's right, Sarah. So, you can take 25% of your pension fund as tax free cash up to a maximum of £268,275. Now to get a tax free cash lump sum of not far off £270,000-,

Sarah Pennells: A lot of money.

Clare Moffat: You'd need to have over £1 million in-, of, of a pension fund. It is a lot of money. But figures from the Office of National Statistics show that over a million people have over £1 million in pension savings. So, actually, this upper limit, well, it might affect more people than you might imagine. Now in addition to that, there are some people who will be able to take more than that £268,275 figure, and that's because they have something called tax free cash protection, and that came with some older style occupational pension contracts. And also, some people have a higher amount, and that's because of different reasons, but it-, they will have a certificate that says that they are entitled to a larger amount than that. Now you would know if one of these situations applied to you. However, for the vast majority of people, the maximum is 25% of your pension fund up to a total of £268,275. So, I think that's tax free cash, but, Sarah, what's the difference between the, the different ways that you can take money out of your pensions.

Sarah Pennells: Well, most people will take some tax free cash. And when it comes to the rest of the money there are, sort of, three options. The first is to buy annuity. The second is to go into income draw down. And the third is to take cash lump sums directly from their pension. Now before we talk about those, I think it's time to have a bit more of a jargon-buster to explain some of these terms. So, in the world of pensions A is for, well, annuity, among other things. Now annuities have been around for years, but the workplace pensions research I referred to earlier on, also showed that quite a few people either hadn't heard the term annuity, or didn't know what it meant. So, let's explain it. When you buy an annuity you effectively swap the money that's in your pension pot for an income that's guaranteed to last for the rest of your life. Now the benefit of an annuity is that you do get this guaranteed amount, and it will last for as long as you live. Now you could use your whole pension fund and buy an annuity, or you could, as I said, take out tax free cash. That's down to you.

There are some decisions that you have to make. So, you can choose to have your annuity rising in line with inflation, or a set amount, or you can also choose to have a pension that's paid to your partner, or husband, or wife, and we'll talk about that more later. I think though before we talk about the other ways you can take money out of your pension, it's worth a quick recap as to what happens to your pension contributions when you're building up money in your pension fund. So, the money that you pay in to your pension, and any contributions from your employer if you're in a workplace pension scheme, and the tax relief, well, that's gonna be invested by your pension provider on your behalf. Now normally, there'll be a range of different funds that your money can be invested in, but if you don't actively choose which fund, or funds to invest your pension money in, then it will be invested in what's called the default fund. Now the make-up of a default fund varies from one pension to another, but the idea behind a default fund is that it suits the needs of most members of the workplace pension scheme. And it will arrange-, it will invest in a wide range of assets.

So, that will include things like company shares. It will include bonds, which are simply IOUs for loans either to companies, or to the government. And it could even include things like commercial property as well. Now you don't have to keep your money invested in a default fund. You can choose to move that money to a different fund if you prefer. So, we talked a bit there about-, a bit of a, sort of, speedy recap as to what happens to your pension contributions, but, Clare, how does that link to what happens if you move your money into drawdown?

Clare Moffat: Well, drawdown, it works a little bit like you've just described your actual pension fund works, because it's actually going to be a combination of different investments. Now we mentioned that a lot of people take their tax free cash, and move the other 75% of their pension into drawdown. Now, of course, one of the benefits of drawdown is that you choose how you want to take the money out. So, you can take a regular amount out, out every money. You can take out lump sums. You don't touch it perhaps until, until you need it. The most important thing to remember is that drawdown fund has to last you for the rest of your life, unless you have other savings or investments, or you're happy to live in the state pension age if you are state pension age.

Sarah Pennells: Well, I, I tried to live on the state pension for a week last year as a challenge with some of our customers, and it was tough. So, not an option for me, I'm afraid.

Clare Moffat: Yes, and I think that's certainly really difficult. And I think that's one of the reasons that many people when they are thinking about taking their pension benefits, and certainly when they're thinking about moving into drawdown, that's when they would go and take financial advice from a financial adviser, to talk them through all of these different things. Now one thing to mention is that you can't pay money directly into your drawdown fund. So, if you've moved all of the money from your pension into your drawdown pot, and you want to pay more in, then you would have to pay that into the pension, and then move that across to drawdown again. But I think the key point is that, you know, pension money is still invested when it's in drawdown. Now it should grow, but there is absolutely no guarantee about this, and it could also fall in value, and you could end up with less in your drawdown fund than you actually moved into it in the first place. Now, as I mentioned, you, you know, you can choose how that's invested. Your adviser can help you with that. And lots of people like having that choice, and being able to pick where it is invested.

But if you don't want to choose where it's invested, or you don't feel confident doing that, then there are options called, 'Investment pathways.' Now all providers have to offer investment pathways for those people who don't want to buy a guaranteed income, an annuity, straight away. And as you can see on screen now, there are four investment pathway options. So, option one. Well, that's for people who don't plan to take their pension money for-, within the next five years. Option two. Well, that's for people who plan to buy a guaranteed income, an annuity, within the next five years. Now the idea is that this investment option maintains its buying power. Option three. Well, that's for people who plan to take income from their pension within the next five years. And option four. Well, that's for people who plan to take all of the money out of their pension within the next five years. Now you can swap from one of these investment pathway options to another, or indeed to a completely separate fund. You're not locked into this throughout your retirement, because, Sarah, things change in retirement, and what people want to do, that changes too.

Sarah Pennells: Absolutely. Now another option is to take cash lump sums directly from your pension pot, and in that case 25% of every payment will be tax free, but the other 75% will be taxable, and you have to take both those payment at the same time. Now it is important to say that you can have a mixture of the different ways of taking money out of your pension. That was reflected in the answers we had in our first poll. So, for example, you might decide that you want to go into income drawdown when you retire, say that's 55, or 65. And then when you're a bit older, when you reach 75, well, at that point you want to buy an annuity, because you want the guarantee of knowing that that income will last you for as long as you live. Or perhaps you decide you want to buy an annuity to cover the cost of your essential bills, and then the money that you have left over you'll move into drawdown.

Clare Moffat: Now-, so, Sarah, we've had a question that's related to that from Alan, and he's asked, 'Is going into drawdown better than buying an annuity?'

Sarah Pennells: I was about to ask myself a question there, but, anyway. So, I mention the situation a moment ago where, you know, you can have this mix of different ways. And let's just explore that in more detail. So, with an annuity, as I said earlier on, you hand over your pension fund in exchange for this income that's guaranteed for life, but there are some decisions that you'll be faced with as part of buying an annuity. Now one of the biggest ones is whether the payment you receive from your annuity stays at the same level throughout your retirement, or whether it increases either in line with inflation, or a set amount. Now there are pros and cons to each. If you, say, retire when you're 65, and you're taking out your annuity then. Then what might seem like a reasonable income level if you choose to have that level annuity where payments don't go up, if we're living in a time when inflation is fairly high, by the time you're 85 twenty years later that income level in real terms may not be enough to cover those essential bills that you have. But on the other hand, there's quite a lot of research that shows that for many people, not necessarily everybody, they spend less money as they progress through retirement.

So, you may be spending more money in the early years of your retirement, and then by the time you get to 85 you don't actually need to have as money to spend. Now there's a-, another decision to make if you have a partner, or husband, or wife, which is whether they get a pension from your annuity after you die. Now you could choose, for example, that they receive a fairly small percentage of the payment that you were getting, 25%, for example, or 50%. Or you might think, 'Actually, no, they have very little other income, I want them to have the same level of pension that I received while I was alive.' Now there are a whole range of factors that go into working out the cost of buying this extra payment through an annuity, but one of those is the level of pension that you choose for your husband, wife, or partner. Now the bigger the percentage the more it costs. But whether or not you have a, a partner, and whether or not you want them to have a pension, there's another decision as well, and that's about whether to buy an annuity with what's called a guarantee period. Now the terminology can be really confusing, so, you know, apologies for that.

I mentioned at the start that annuities provide a guaranteed income, or are described as providing an income that's guaranteed for life, and both of those are true. A guarantee period is something different. So, let's explain it with an example. Supposing I'm 65, I want to buy an annuity, and I buy an, an annuity with a guarantee period of ten years. And then sadly five years after I buy the annuity I die. Now with the guarantee period what that means is that the people I choose to inherit, my loved ones, would receive a payment. If I chose that same annuity with the guarantee period of ten years, and then happily I'm still alive at the end of ten years, then they wouldn't receive anything. But as we can see there are a number of important decisions that you are faced with if you want to take out an annuity. And with an annuity, once you've made that decision, you know, you get a cooling off period, but once that's elapsed that's it. You can't change your mind. So, for example, if I decided I'm going to take out an, an annuity, I don't want the income level to rise in line with inflation.

And after a few years inflation is quite high, I'm finding that my income isn't really stretching, I couldn't then change my mind a few years down the-, down the road. Now, Clare, we talked in a bit of detail now. We've gone through the tax free cash. I've just talked through some of the decisions around an annuity. What about the examples of drawdown, or cash lump sums, let's have a bit more detail on that.

Clare Moffat: So, I think it's actually worth looking at an example with this. So, we've got the example of Paul. Now Paul is 55. He is earning £45,000 a year, and he has a pension fund of £100,000. Now he wants to buy a new kitchen, £25,000, and he knows that he can take some tax free cash. He lives in England, and he's a basic rate tax payer. So, how can he get that money from his pension pot in the most tax efficient way. But I think it's time for another poll, and we're going to see what everyone thinks that Paul can take out as tax free cash, £25,000, £50,000, or £75,000.

Sarah Pennells: Let's see if everyone's been paying attention. So-,

Clare Moffat: Oh, 100%.

Sarah Pennells: Alright, so, so more prizes.

Clare Moffat: More prizes. So, that's, that's correct. £25,000 is the right answer. But back to what Paul can do. Well, he can take out a cash lump sum, in fact he could take out the full amount of £100,000, but he's going to get the £25,000 that he needs for his kitchen tax free, but as Sarah mentioned, the other 75%, well, that's going to be taxable. So, that £75,000 is going to sit on top of his salary of £45,000, which means he's going to have taxable income of £120,000. So, he is going to be paying a lot of higher rate tax. Plus, he doesn't actually need that other £75,000. So, it would be coming out of an income tax, and an inheritance tax friendly environment of his pension to potentially sit within a bank account. The other option is that he could take his 25% tax free cash, and move the other £75,000, the other 75% into drawdown. Now that's where, as we mentioned, it would be invested, it should be growing, and only when he needs it would he start taking some income. Now if Paul does that, and only takes the tax free cash, then his taxable income stays the same at £45,000.

Now if that £100,000 was made up of multiple pension pots it's the same. He can take 25% from each, and then move the other 75% into drawdown. But often, people take more than they need in tax free cash. So, what if Paul didn't need as much as the full amount of tax free cash? What if he needed £10,000 instead? Well, he could take that £10,000 of tax free cash, and move the other 75%, which would be £30,000 into drawdown. So, let's summarise that a little bit. From £100,000 he's taking £10,000. £30,000 has gone into drawdown, and there's £60,000 left in his pension pot. Now let's presume he leaves it for some time, and it increases to £65,000. Then he decides he wants to take the rest of his tax free cash. So, he'd be entitled to £16,250 of tax free cash, and £48,750 would move to drawdown. Now that's £1,250 more than if he'd moved it all into drawdown at the same time. Now that's because he can take 25% of a higher amount, because there's been growth on his fund. But it is important to remember that if his fund had decreased in value then it would be 25% of a lower amount. But there's also other choices available.

So, say Paul doesn't need a lump sum of tax free cash at all. What if he wants to reduce his working hours? Then he could actually take his tax free cash in stages. So, say he would like to take £250 of tax free cash every month. Well, £750 a month would then move into drawdown. So, there's a real flexibility there. And when Paul does want to start taking income from his drawdown fund, perhaps he's stopped working, then he can choose how much income to take. And it can be useful if, say, he wants to stay within the basic rate band, or before he receives his state pension he wants to stay under the personal allowance. So, there is a lot of flexibility around taking drawdown.

Sarah Pennells: And one of the other questions we had submitted in advance was from Rachel who said once she's taken that tax free cash from her pension, does she have to find a new home for the rest of the money that's in her pension?

Clare Moffat: Well, so that depends on, on how it's taken out. So, we mentioned that if you take a cash lump sum then you'll get the tax free element, and then you'll get the other 75%, those come together, and that will arrive in your bank account. But perhaps you've not taken all as a cash lump sum, so there'll be still money sitting in your pension fund, and it'll be invested there. And similarly, with drawdown if you only take, kind of, some tax free cash, and you move the other 75% into drawdown, then there would be some money left in your pension pot, and you'll have some money left-, some money in your drawdown pot. Now remember though that, that, you know, the money in your pension, and in your drawdown fund, well it is invested, but it is going to look after you in your retirement. So, it's really important to be aware of that, and again, you know, it can be a useful time to take advice for help on what you should be invested in. Because actually what-, you know, when you do start taking money out of your drawdown fund, what you might be invested in could be different from when you were much younger, and saving money into your pension.

Sarah Pennells: Good point there. And the other thing to, sort of, bear in mind is that-, just a couple of things to think about if you are taking money from your pension. So, if you're taking money out of your bank account then you'd probably just go to a cash machine, or maybe you'll transfer it from your app, and it'll be-, it'll be there, sort of, pretty much straight away. But if you're taking money from your pension it's a bit different, because the pension company will need to carry out some checks on you to make sure it's paying the right person for the first payment that it makes. So, if, going back to your example of Paul who's got his kitchen, you are taking money from your pension for a specific expense, then it-, you have to just make sure there's enough time for that money to come into your account before you need to pay your supplier. And we were talking earlier on, Clare, well you were mentioning how, sort of, HM Revenue and Customs will treat money that's coming out of your pension almost like salary. So, because of the amount that's taken off in tax, there could be less money going into your bank account from your pension than you expect. So, let's just explain that a bit.

Clare Moffat: So, I think this is really important, and, and it's really worth unpicking. Now as we mentioned, HMRC treat this as a salary. And what happens is that if you take a large amount of money out, HMRC are going to presume you're going to get the same amount every month. So, let's look at Paul's example again, but change the scenario a little bit. So, he hasn't taken anything from his pension, but he's stopped working. So, he decides he wants to take all of that £100,000 out of his pension. So, HMRC believe that he's going to take out £25,000 tax free, that's fine, but £75,000 they think is going to hit his bank account every month, which is a lot, a huge amount of money. It's a lot. Now anyone in this position is going to find themselves paying a lot more tax than they should initially. So, if we look at this slide on screen. Now there's a lot of numbers on this slide, but just focus on the bottom right, and the numbers in teal, or green. Now that-,

Sarah Pennells: I call it teal. You call it green.

Clare Moffat: That's what Paul would see in his bank account.

Clare Moffat: That's what Paul would see in his bank account. £67,871.13. But if we move onto the next slide, again, in the bottom right, this is what Paul should be receiving. £82,568. So, around about £15,000 of a difference. Now, in the end, Paul will receive that higher amount of money, but because of emergency rate tax, then he's going to either have to claim back that difference, that £15,000. Or he's going to have to wait on the tax system sorting itself out, which it will, and then he would get a refund. So, it's really important if you're taking large lump sums, either out as a cash lump sum or out as a large lump sum from drawdown to remember this. Especially if you have a plan for that money, because it just takes a little bit longer to get the full amount. But moving on, we've had a question from Jerry. Now, Jerry's question is, can he still pay into his pension if he's already taken money out of his pension? Now, the answer to that is yes, but some people won't be able to pay in as much as others. And that's because of something called the money purchase annual allowance. So, Sarah, can you explain about this?

Sarah Pennells: Yes. So, what the rules say is, if you take money from a defined contribution pension flexibly, so that means if you're either taking income from drawdown or you're taking cash lump sums where there's a taxable element. Then, as Claire mentioned, the, the money purchase annual allowance kicks in. So, more terminology but let's explain how this works with an example. So, the rules say that when you're building up your pension, then you can pay up to 100% of your salary into your pension and you'll still receive tax relief on your pension contributions. Now, of course, you know, most people aren't going to be tipping 100% of their salary into their pension. But that's actually what the rules let you do. However, there is something called the annual allowance, which limits how much you can pay in without facing a tax charge. So, assuming that you have the salary to support it, you can pay up to £60,000 a year into your pension without facing a tax charge. However, if you take money out of your defined contribution pension flexibly, as we just mentioned a second ago, then something called the money purchase annual allowance is activated or kicks in. And that limits the amount you can pay into your pension to £10,000 a year.

Now, that sounds like a lot of money, that's, kind of, £800 a month but there might be situations where you want to pay in more than that per year. So, let's look at an example where, you know, say you've stopped work, you've retired, and then maybe after a while you're thinking, 'Actually, I want to go back to work. I miss work.' And you want to, maybe, make up some time with your-, lost time with your pension and pay more money into your pension. Or perhaps you've stopped worked, you've retired, and then you're finding the cost of living means that you actually can't afford to retire. And our cost of living research is showing that more and more people are in that situation. So, I've mentioned the £10,000 limit and that it's £800 a month, which sounds like a lot. But that £10,000 limit includes not only your contributions, but your employer's contributions and any tax relief you get as well. Now, if you are in the situation where you are limited by the money purchase annual allowance then you will have received a letter that tells you that. So, Claire, I've talked a bit, sort of, briefly about when it does apply. But just explain when it doesn't apply.

Clare Moffat: So, it doesn't apply if you have a defined benefit pension, so, like a public sector pension, I mentioned right at the very beginning. And it doesn't apply if you have a defined contribution pension and you take your tax free cash and then decide to buy an annuity. Now, both of these situations are similar because what you actually have is a guaranteed income, and it's fixed, and there's no flexibility with what you can do with it. Now, it also doesn't apply if you only take your tax free cash and move the rest into drawdown and you don't take any money from drawdown. Perhaps because you're still working. And it also doesn't apply if you take up to three small pensions of less than £10,000 each.

Sarah Pennells: And, we've covered a bit about when it applies, but just recap on then when it does apply.

Clare Moffat: Okay, so it does apply if you move your pension pot into drawdown and you start taking even £1 of income. Or you take any amount of one of those cash lump sums. So, I think that's covered quite a lot. We've got one last area that we want to cover briefly, and this is about accessing pensions before the age of, of 55. Now, Sarah, you did mention this briefly at the beginning, but we had a question from Mira. Now, she says, well, she has two defined contribution pensions, but she's sadly been diagnosed with cancer. She's stopped work and because of the prognosis, she's unlikely to work again. Now, she's 51. So, if you're under 55, there are two different scenarios in which you can take out money when there's ill health. So, firstly, in cases of serious ill health, well, that's where sadly someone has been given less than twelve months to live. Now, they can take all of their pension out as a tax free lump sum. Now, that's not always going to be the best idea because, especially if it's a very large pension, then if they don't spend all of that money and there's still a lot left when they, they do pass away. Then this could be sitting in a bank account, and if they have a lot of other assets, then inheritance tax could be a problem there.

But, lots of people don't know about this, and accessing that money could be really helpful for someone in the last year of their life. Now, the other-, the other, kind of, area in terms of ill health is something called ill health retirement. Now, that's when you can access your pension early because of poor health. Now, it's known as medical retirement or retirement on medical grounds as well. Now, in this case, the normal age in which you can access pensions doesn't apply. So that age 55 doesn't apply. Now, if you qualify for ill health, then you can normally have the same options that you would do if you were 55 or over. If you find yourself in either of these two situations, then you'll need to provide supporting medical evidence to be able to take your pension early. Now, it's really important that you talk to your advisor if you have one, or your pension scheme or pension provider. Because they'll really help you through this process. And also, for more information, look on the government backed and independent website, MoneyHelper.

Sarah Pennells: Well, we've covered quite a lot, I think, in the last, well, 35 minutes or so. So, it's time to go to some of your questions. So, Claire, let's, let's, let's have a look at some of the questions that have come in.

Clare Moffat: Yep, so, I think sitting at the top of the charts is, from Tony, 'If you have more than one pension, can you drawdown 25% of each?'

Sarah Pennells: So, what's the answer then?

Clare Moffat: So, yes. So, if you had four pensions of £10,000 each, you could take £2,500 from each of those four pensions and you could move the other 75%, the other £7,500 into drawdown. So, it doesn't matter how many different pensions you have, you are entitled to that up to that maximum of £268,275. But, it, it doesn't matter in the number of pots that you have.

Sarah Pennells: Great stuff. Well, good to get an answer to that. So, we've got a question from Roy and he says, 'Is there a difference between drawdown and crystallisation or are they the same thing?'

Clare Moffat: Oh, so, in the pension world we love a technical term. And crystallisation is just-, and that's, that is changing a bit next year but we'll not get into some of that. But-,

Sarah Pennells: Let's not get too head-melty.

Clare Moffat: But crystallising is, is basically when you're doing something actively. So, that was-, you could be crystallising by moving into drawdown, you could be crystallising by buying annuity. It was when you were actively doing something, so you were taking some tax free cash and then you were doing something with that other amount of money. So, not, it's, kind of, part of the same thing. But it just was when you were actively doing something, so when we spoke about the options of drawdown, annuity and cash lump sums, that's effectively you are doing something and you are moving from your pension pot into something else.

Sarah Pennells: Okay. So we've had a question from Andrea who says, and I think this is a really interesting one. It's one I think we get in every, every webinar we do, which is, 'How do I know if I'm paying enough contributions? How to decide how much to pay into her pension?' And we've covered this in-, we covered this in a webinar we did in March, which was how to get the most from your pension. And I think we've covered it in, in probably, sort of, most of the webinars. And it's one of those things where you, kind of, want to give a really simple answer and say, you know, this percent. And there are some figures that various people, sort of, use as a guideline. One of the things I think that we've found quite helpful in terms of explaining how to think about how much to pay into your pension is, is, sort of, to work backwards, in a way. To look at what you might need to live on when you retire. So, as I said, we do have all the webinars on our-, on our Royal London dot com website. So you can have a look, search under webinars, and we've got links to them.

There is a, an organisation or website called Retirement Living Standards, the website address is Retirement Living Standards dot org dot UK. And what that does is show you how much different lifestyles in retirement will cost you. Now, it's based on independent research and it's been commissioned by the Pensions and Long-Term Savings Association. And that will show you how much a minimum standard of income in retirement might get you. And it's, kind of, maybe, the odd weekend away or holidays in the UK and not being able to run a car, for example. How much a comfortable, standard living retirement would get you and that's, kind of, holidays abroad, being able to renew your car, have a new kitchen, all those kind of things. And then, sort of, the moderate, the in-between. It is actually a really good starting point, and I think the other thing, and I'll let you come in in a minute, Claire, but I think the other thing, maybe to think about is, is, finding out how much you're gonna get from the state pension. And we've got a state pension hub on, on our website on Royal London dot com which tells you how to get a state pension forecast.

And, again, we did some research on state pensions early on this year and we found that quite a few people hadn't got their state pension forecasts. Now, this will tell you how much state pension you're entitled to receive, or you're on track to get. And I think knowing how much you're gonna get from the state pension and, crucially, because the state pension age has been rising, knowing when you're going to get it. That's, it's, kind of, like, the key part of the jigsaw, really, isn't it? If you're trying to work out how much you need to get in retirement. Then you need to think, 'Okay, I'm gonna get this much from the state, this is when I'm gonna get the state pension, looking at the Retirement Living Standards website, actually, that's how much I want to live on.' And then start thinking what the gap is. And, there are some calculators. The MoneyHelper website we've, which you mentioned earlier on. Pension providers often have calculators to help you workout what you're on track to get.

Clare Moffat: Yep. And I think all of those points are great. But often it can be that, you know, your pension provider will probably have an app, that might be able to give you some indication of how much, you know, it will say how much you're paying in. It might give an idea of what that would buy at, kind of, the retirement age that you've put in. So, all of these things together, but it does feel like it is the, kind of, million dollar question, doesn't it?

Sarah Pennells: And I think it's one of those things, you know, we're in a cost of living crisis and we keep talking about this. And it's not about, you know, being tone deaf and saying, you know, 'You should be all paying so much money into your pension.' But I think, in a way, from, sort of, conversations that I've been having, one of the things I think the cost of living crisis has brought into very sharp relief is, actually, what it's like living on a limited budget. Or what it's like when your costs are increasing. And although, you know, prioritising today's bills makes a lot of sense. But actually it's also important about, kind of, not losing sight of the fact that when you stop work, whenever that is and whatever your situation is, then you are going to have to live on what the state provides by way of a state pension. And other pensions, whether that's workplace or private pensions as well.

Clare Moffat: So, we've got another question from Jonathan. He says, 'Having taken out a sum of money from my pension a few years back, I'm still investing an amount every month. How does this affect the 25% tax free sum?' So-,

Sarah Pennells: Do you want to kick off with that?

Clare Moffat: Yeah, so that, well, there's probably two different parts to this question. So, it's a bit like the scenario of Paul, where he's taken some money out of his pension and he's moved some into drawdown and he's taken some tax free cash. So, you would still have an entitlement to tax free cash from that amount that's still in your pension pot. So, say that you had, kind of, saved another £10,000 into your pension pot, then you could take another 25% of that, so £2,500 from that. So, any money that's, kind of, in your pension pot and hasn't moved into buying an annuity, been taken as a cash lump sum or moved into drawdown, then you'll have that 25% up to that maximum of £268,275. And, and also, just, you know, I'm sure this is something that Jonathan's aware of, but, I'll remind you about that money purchase annual allowance. About the maximum that after you've taken some money out, if you've taken any income from drawdown then you would be restricted by that. If you haven't, and all you've done is take your tax free cash, then you wouldn't be restricted. So, yeah.

Sarah Pennells: Great stuff. I'm going to jump around a bit, because we had a question from Yvonne which repeats an earlier question. But I think it's just worth repeating the answer, because I think it does cause a lot of confusion. So, Yvonne says, 'If I have two pensions, can I take 25% tax free cash, in brackets, from each one?' And, as you mentioned earlier Claire, the answer-, the answer is yes. So, you're not limited if you've got more than one pension, it doesn't mean you can only take that tax free cash from one pension. Okay. Time to go onto another question. Now, this is from Shaun. And I think this is a really good question as well, so it says, 'How easy and how quick is it to set up a monthly income from a pension?' Now, I don't know whether he's referring to buying an annuity or taking a monthly income from drawdown. So shall we-, shall we go with the drawdown bit first?

Clare Moffat: Yes. So, I think it's-, you have-, you have different options. You know, so you don't-, just because you've saved your money with, kind of, one company, it doesn't mean automatically you have to go into drawdown with that company. You could take financial advice and do, you know, maybe choose something differently. But it's a, kind of, administrative process. Sarah, you mentioned that, you know, especially if you are potentially moving companies then there's, kind of, regulatory responsibilities including checking for scams and things like that. To make sure that your money is going somewhere that's, like, a recognised company, for example. So, it's not as quick as, as you mentioned, as, kind of, taking money out. Especially when you are doing it for the first time as just, kind of, you know, it's happening today. But, you know, it should be, kind of, have to go through the right regulatory processes, but it shouldn't be something that, you know, takes months and months. You know, it should happen quite quickly.

If you're in a defined benefit pension, then sometimes you have to give them more notice. It can take a bit longer, especially some of the public sector schemes. So, you know, bear that in mind as well. So there's, kind of, different processes that have to be gone through in different places.

Sarah Pennells: Okay. Well, we're getting lots of questions coming in, which is great. So, I'm gonna go to this question from Jeanette who says, 'If you take your pension but want to continue paying into a pension fund, I've heard about a £4,000 limit that you can pay tax free. Is this correct?' So, I'll leap in here. Jeanette, you're right to, kind of, raise this. So, this is what I was talking about earlier on, the money purchase annual allowance. And this applies, just to, kind of, give a recap, if you take money flexibly from your defined contribution pension. So, it doesn't kick in if you just take the tax free cash lump sum and it doesn't kick in if you move your money to income drawdown but don't take any income from it. Now, the money purchase annual allowance, which is the amount that you can then pay into a pension without paying a tax charge used to be £4,000. But that was increased in the budget in March to £10,000. So, you're right that you are affected by a different limit but it's not £4,000 anymore, it increased in the budget in March to £10,000.

Clare Moffat: So, another question from William. So he says, 'I'm 66 and still working. What percentage can I take as tax free lump sum and what happens to the remainder and any additional contributions from me and my employer?' So, it's still 25% unless, you know, you are going to be caught by that £268,275. So, it's still 25%. And your employer contributions will still be going in, so that's all still going into your pension fund. And then, you know, that's, it's just the same. You can take your 25%, you can move it to drawdown and then if you're still working that's probably-, you know, that's maybe a better idea because you don't need to be taking any income from that right now because you'd just end up paying more tax on it. And, yeah. I mean, probably one thing to mention is that the tax relief on pension contributions, you don't get any tax relief after the age of 75. So, you know, if people are still working, kind of, older, then that would normally be, kind of, when they're-, you know, you're not getting the tax relief on pension contributions. So, but we don't find that many people are. People are working longer, but not normally as long as that.

Sarah Pennells: Yep. Okay. A couple more questions to rattle through. So, we've had one from Tim and he said, 'What happens if you have several different pots with different providers?' Sorry, wrong question. It's a question from Roger. 'Is the £268,000 limit on taking out tax free cash per pension that you have or cumulative over them all?'

Clare Moffat: I think people who have a lot of money in pensions would like it to be individually, but unfortunately it's not. So it's cumulative. So, that is £268,275 for all tax free cash that you would take in your lifetime. So, that is, kind of, the test.

Sarah Pennells: And I started reading out Tim's question. Apologies Tim, the reason I stopped is it's the repeat of the question we had with Yvonne earlier on. So, if you have several different pension pots, is it 25% tax free per pot? And the answer is yes. And, you know, obviously really good to keep repeating this. Because it is, I think, something people get quite confused by. So, a question from Pamela saying, 'How are you taxed on your pension when you're no longer working?' And I think, just to kick this off with one thought, which is, now I don't know whether someone's no longer working and is under state pension age. So, they're under 66, the current state pension age, or whether they're no longer working and are over state pension age. But many people don't realise that the state pension itself is taxable, but it's paid in a slightly different way. So, just explain that, Claire.

Clare Moffat: Yep. So, let's think about someone under state pension first of all. So, if you're under state pension, perhaps you're taking-, say your pension is providing £10,000 a year. So, that would be under your personal allowance so you'd not be paying any tax on that because it's under the personal allowance.

Sarah Pennells: So just remind us of the personal allowance.

Clare Moffat: So, the personal allowance is £12,570. But, what'll often happen is then, so people have been used to not paying any tax, for example on that private pension or workplace pension that they've started to take. Then they reach state pension age, and state pension comes in, and as you mentioned, it's, it's paid tax free. But it still sits in your, kind of, tax stack. So you've got the state pension of that, kind of, amount, which is just, you know, remind me of the amount, Sarah?

Sarah Pennells: £10,836.

Clare Moffat: So you've got that and then you would be paying-, you would only have a small amount of your £12,570 which would be tax free of your private pension that you were receiving tax free before. Because that's just going to sit on top. So you will end up paying tax after that point. So it really, kind of, depends if it's before state pension age, or often what happens is people reach state pension age and then the tax will be taken off their private pension not their state pension. You will get the state pension, that, kind of, comes first, then you're private pension is going to sit on top of that. And that's where tax will be paid. And pension providers just operate in the same way that an employer would be. They get a tax code, they apply the tax code, that's what happens. So, it's not as if they've suddenly decided just to take more money off you. It's because that's, you know, the system that we have.

Sarah Pennells: Okay. So, we've got a question here from Ozazua. So, which is, 'Is the 25% tax free cash that you can take out of a defined contribution pension, is that based on the balance once you're age 55 or at the time you start taking money out?'

Clare Moffat: So, it's at, at the point that you take money out. So you might not touch your pension at all so, and some people don't. Some people are still working or some people have other investments and, you know, pensions are in a very tax friendly environment so often people leave those. So, if you, say you are 70 and you decide that, 'Now I'm going to take my pension.' It's that value at that point in time, it's that 25% of that total value that's the, the amount that's important. And as we worked out in the example with Paul, you can take some out then, you know, build up some more in your pension and then it's 25% of the higher amount as well, so.

Sarah Pennells: Okay. So, I think we'll take a couple more questions. So, we've got one from Claire who says, 'Can I take all-,'

Clare Moffat: Good name.

Sarah Pennells: 'All of my pension.'

Clare Moffat: Strong.

Sarah Pennells: Yeah, not enough Claire's around. 'Can I take all of my pension as a lump sum?' She says, 'I'm 56 years old.' She said, 'I stopped working last year and haven't contributed since then.' And I think-, I think this is, again, it's quite a common question. And sometimes people feel like they don't quite have control of their money unless they have it in a bank account or a savings account. But, pros and cons. Why might that be maybe not a good idea or why might it be a good idea?

Clare Moffat: So, I think it depends on the amount that's in the pension sometimes as well. So it's working out that. If you had half a million pounds in a pension, for example, then it would be a very bad move taking out from somewhere where it is in a-, in a tax friendly environment. You might have £10,000 in a pension and, actually, you really need that money or you want to do something so it's worth taking it out. But the problem is, if you take out one of the, you know, if you take out, say it's £100,000 like in the example with Paul. Then you're going to end up, you know, paying, even if you aren't working, you're going to be paying a lot of tax on that. Because that taxable section of it is going to use your personal allowance up, it's going to use your basic rate band up, and it's going to be using a lot of the higher rate band as well. So, if you do need the money, then even structuring it over two tax years works better from a tax point of view. But it really depends on the amount.

But Sarah, as you mentioned, people do almost feel that they, kind of, want to have more of a control than they do. But, you do have control over, over, kind of, your pension pot and your drawdown fund. And it's certainly, you know, we spoke about it in the session where we talked about what happens to your pension when you die. If you die and you've got money left in your pension then it would go to your beneficiaries and things. So, but there are reasons why people want to take the money out of their pension. And, you know, we see people maybe to pay off debts, perhaps to pay off mortgages, things like that. But just be aware, depending on the amount, even if you don't have any other taxable income, you will pay basic rate and potentially higher rate tax on, on that as well. Because it just works on the total in a year.

Sarah Pennells: Okay. So, I think we'll just take one last question, which is from Timothy. And he says, can you just, sort of, explain drawdowns? So, you, obviously, you've talked it through, you've given an example. But just, sort of, sum up what, what are the key attributes, if you like, about drawdown compared to an annuity or taking cash lump sums?

Clare Moffat: So, it's, I suppose the, the key thing, the key difference is there's a flexibility in it. So it's still invested, we, kind of, explained it, it's a bit like your pension pot. It can be invested in thousands of different investments. When you're in drawdown, so you've moved all of your money into drawdown though, you would want to be thinking and, and probably talking over with an advisor things like risks. So, you know, you don't want to be in really high risk things if you're taking money out of that fund because, you know, you can-, it's that, kind of, 'Well, what would happen if you lost more money because high risk?' Although the returns could be really good, actually, you could-, you could lose money as well. So, it's-, I always just think of it as, kind of, two pots. So one's a pension pot, one's a drawdown pot. They could have the same mix of investments in them, but it's what you choose for them to be in. So it's just, kind of, a variety of different funds. And it's just a means, you can take out money in different ways. You can take out, if you had £100,000 in drawdown you could take £50,000 one day and then take out £100 a month after that. Or you could just structure it to take out £10,000 a year, for example. But you can change it.

So, I think that's the important difference with drawdown. It's there's a flexibility. You mentioned with an annuity, once you've bought an annuity that's it. If you don't have a guarantee period and you die, then there's, you know, there's, kind of, nothing. Whereas with drawdown, whatever's left in that pot will go to your beneficiaries. And a cash lump sum, well it's just, kind of, coming out of that pension pot. So, again, the difference is, is it's, kind of, coming out of somewhere where it's invested, you're going to get some tax free cash. But you're going to get that other amount of cash into your bank account that's taxed. So, I think that's the main difference. But, there's similarities to, kind of, how it sits in your pension. It's, it's just sitting in a pot, essentially, in different investments which you would choose or your advisor would help choose or you would use one of the investment pathways.

Sarah Pennells: Yep. I think-, I think that really sums it well, Claire, this idea that, you know, you do have much more flexibility than if you were to, for example, buy annuity. But the flip side of that is, it's your responsibility or, you know, obviously if you're working, if you're using an advisor, you have to make sure that that money lasts for your life. So you have to make decisions about where it's invested and also how much money to take out, not only from a tax point of view, but also from a, sort of, income sustainability point of view. As in, making sure you don't take out too much money early on so then, in your later years of retirement, you don't actually have any money to fall back on, so.

Clare Moffat: And I think that, that is really important. Because we know that, I think, you know, there's a lot of children being born today that are going to be predicted to live until they're 100. People are living much longer and so if you want to have enough money in retirement, you've got to manage that, that pot of money. And that's why I do think taking advice at that point in time is good. Because an advisor will help you to understand the risk, but also making sure that money lasts.

Sarah Pennells: Great stuff. Well, yeah.

Clare Moffat: Well, yeah.

Sarah Pennells: Don't think we've got time to answer any more of your questions, but before we go, we do have one last poll, which is, we're going to be covering in our next webinar, which is the first one of 2024. We're going to be talking about tax year end, but what we'd like to know is what other webinars would you like us to put on in 2024? So, please vote using the Slido link.

Clare Moffat: Okay, so.

Sarah Pennells: Wow, that's a.

Clare Moffat: 71% of people are saying finding a financial advisor so, yes.

Sarah Pennells: That's what we'll cover then.

Clare Moffat: We'll be looking at that for 2024. So I think that just leaves us to say, well, thank you very much for listening today. We're going to be sharing a link of the recording and yeah, thank you for joining us.

Sarah Pennells: Thanks very much, bye.