From tax-free cash to allowances, transfers and annuities, we tackle your top 5 questions on the current IOM pension rules and what they mean for your income options in retirement
1. Should I take my tax-free cash?
The ability to take up to 30% (or 40% if you have an IOM PFS Pension) from your IOM pension as a tax-free lump sum can give the early years of your retirement a real boost. However, before you get swayed by what the money could buy you, should you take it just because you can. There’s a whole host of consideration to consider first.
“When and why? What will you do with it? Have you considered the alternatives? What impact will it have on your life
right now? If you do take it what will your income level be from the remaining pot? Is that income enough? What will it cost you to do it? Will you be giving up any guarantees by taking it?”These are the sorts of questions to ask yourself.
There has to be a good reason to take it not just because you can.
2. Should I still buy an annuity?
Drawdown is regarded as flexible and giving savers control, while annuities are considered the very opposite,with rates offering a very low guaranteed income that you will likely be locked into.
Looking at the current rates and lack of products available for IOM residents it would be very rare to see a recommendation for an annuity, especially given the evidence available to support the case for a sustainable drawdown level with the right investments.However, we would always check if you are one of the lucky few that have guaranteed annuities built in to their pension product as they are extremely valuable.
There is still a place for annuities in financial planning, but it’s no longer an all-or-nothing decision and it may be some years before rates improve to an acceptable level to be a valid consideration.
3. How much can I take from my pension?
Unless you buy an annuity, you will have to carefully manage how much money you can take out of your pot to ensure that it doesn’t run out. Cashflow planning is imperative when it comes to income drawdown as it will clearly map out the options. From our research a sustainable rate of withdrawal is currently around 3.5% of the value, slightly less than the 4% rule often quoted. But before looking at the numbers, you’ll also need to think about what you want to do with your retirement and what your financial priorities are – for example, whether you want to really make the most of your early years while you’re fit and well, or whether you want to stock pile your cash for care later in life or an inheritance for loved ones.
4. Must I take an income from my pension?
The simple answer to this question is ‘No’. It may be that you’re still working or have other sources of income,in which case there are many sensible reasons for leaving your pension untouched. The retirement age noted on your pension does not mean you have to take the benefits at that specific date. If you don’t need the money, there can be advantages in leaving it within a pension, including tax-efficient growth.
5. Will I be taxed if I take an income from my pension?
Any withdrawal from your pension(after tax-free cash has been taken) will be treated as income and taxed accordingly. However,
if your total income for the year,including the state pension, private pension and any earnings, falls below the annual tax allowance then you don’t need to pay any tax.
The desire to simplify the pension arena generally ends up achieving the complete opposite effect. Always seek advice. How you take your retirement benefit should always be decided after obtaining all the relevant information and this can be complicated especially for IOM residents who also have UK Pensions. That’s a whole other article.
