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Introduction
We all know that many writers do not retire, as it is a vocation. However, whether you plan to stop writing fully, cut back your hours gradually or carry on working for longer, you can now tailor when and how you use your pension pot – and when you stop saving into it – to fit with your particular circumstances. If you have more than one pension pot you can use them separately or combine them. You can also mix and match from the main options we have outlined below. You should however make sure you shop around and get independent financial advice before you make any decisions, as individual pension plans have different restrictions, and your individual circumstances and attitude to risk will also affect what you can do.
Leave your pension pot untouched
Delay taking your pension until a later date. Your pot then continues to grow, tax-free, potentially providing more income once you access it, or a death benefit to your dependents if you were to die before you choose to draw your benefits and retire.
Buy a guaranteed income for life – an annuity
You can normally withdraw up to 25% of your pot as a one-off, tax-free lump sum then convert the rest into a taxable income for life called an annuity. Some older policies may allow you to take more than 25% as tax-free cash.
You can also choose to provide an income for life for a dependant or other beneficiary after you die, and you may be entitled to a higher pension if you have any health or lifestyle issues such as smoking or obesity.
Provide a flexible retirement income – flexi-access drawdown
With this option you can normally take up to 25% of your pension pot or of the amount you allocate for drawdown as a tax-free lump sum, then re-invest the rest into funds designed to provide you with a regular income, which will be taxed at your usual marginal rate.
You set the income you want, though this might be adjusted periodically depending on the performance of your investments.
Unlike with a lifetime annuity your income isn’t guaranteed for life – so you need to manage your investments carefully as your pot could run out if you have withdrawn too much or investment conditions work against you.
Take small cash sums from your pot
You can use your existing pension pot to take cash as and when you need it and leave the rest untouched where it can continue to grow tax-free.
For each cash withdrawal, normally the first 25% is tax-free and again the rest counts as a taxable income. There might be charges each time you make a cash withdrawal and/or limits on how many withdrawals you can make each year.
With this option your income drawn isn’t reinvested into new funds specifically chosen to pay you a regular income. The balance of your funds would stay invested and would provide a death benefit for a dependant after you die.
There are also more tax implications to consider than with the previous two options.
Take your whole pot as cash
Cashing in your pension pot will not give you a secure retirement income.
Normally, the first 25% will be tax-free and the rest will be taxed at your highest tax rate – by adding it to the rest of your income in the tax year that you take it.
There are many risks associated with cashing in your whole pot. For example, it’s highly likely that you’ll be landed with a large tax bill, it won’t pay you or any dependant a regular income in the future and, without very careful planning, you could run out of money and have nothing to live on in retirement other than your State Pension and your savings.