Financial planning for retirement: Your questions answered

We were delighted to present our highly anticipated Retirement Webinar on 23 June.

Hosted by Ben McCarthy, Lifestyle Financial Planner at Attivo, the session covered the evolving retirement landscape, the importance of setting personal lifestyle goals, the different ways to access pension savings, and how cash flow modelling can help test future scenarios.

Ben also explored some of the common concerns people have about financial planning for retirement, such as whether retirement savings will last, market volatility, care costs, inheritance tax and how plans may need to adapt over time.

The subject of retirement naturally raises a lot of questions, many of which were asked by the webinar’s attendees on the day – and which we have shared our answers to below:

Your questions about: Pension access, withdrawals and tax

1. Is the personal allowance £52,000 per year, or is this figure referring to another tax threshold?

Answer: The standard personal allowance is currently £12,570. In England and Wales, the standard basic rate of tax threshold is £50,270. In Scotland, the structure works differently; the tax-free personal allowance is also £12,570, but the tax rate increases as income increases. For example, the Starter Rate is 19% for incomes of up to £16,537, the Intermediate Rate is 21% for incomes up to £43,662, and so on.

2. How does the 25% tax-free pension entitlement work, given that HMRC may deduct tax at source based on anticipated annual income? 

Answer: The 25% tax-free cash is genuinely tax-free. For example, from a £400,000 pension pot, £100,000 could be taken as tax-free cash and paid into your bank account. It does not usually need to be declared to HMRC or included on a self-assessment tax return. Timings can vary by provider, but in theory the payment should usually take no more than a few weeks.

3. Can you still benefit from your personal allowance when taking ad hoc tax-free pension withdrawals?

Answer: Yes. Tax-free cash can be taken separately from taxable pension income. In general terms, pension tax-free cash is separate from your income tax personal allowance. Any taxable pension income may still be assessed against your personal allowance and wider income tax position, depending on your circumstances.

4. If you take ad hoc withdrawals from the tax-free element of a drawdown pension, do you still retain your personal allowance?

Answer: Yes. Your personal allowance relates to taxable income, so tax-free cash is treated separately. Any taxable pension withdrawals would need to be considered alongside your other income and tax allowances.

5. What does MPAA mean?

Answer: MPAA stands for the Money Purchase Annual Allowance. The standard annual allowance for pension contributions is £60,000, subject to earnings and other rules. Once you access taxable pension income flexibly, that allowance will reduce to £10,000 gross a year for future money purchase pension contributions.

6. From age 55, can you access your 25% tax-free cash without triggering the MPAA rules?

Answer: Yes. Taking tax-free cash does not trigger the Money Purchase Annual Allowance. The MPAA is triggered when you start accessing taxable pension income flexibly. The minimum age you can access this is currently 55, increasing to 57 from 2028.

Your questions about: Retirement income options

1. What does it mean for a pension pot to be crystallised or uncrystallised?

Answer: An uncrystallised pension pot has pension savings that haven’t been accessed yet, whilst a crystallised pension pot is one where the pension has been accessed to provide retirement benefits. This can include taking tax-free cash and moving the remaining funds into drawdown, or using them to buy an annuity.

2. Under an encashment option, if you take a lump sum or regular income, can the remaining pension pot stay invested with the potential for growth?

Answer: Under encashment, the whole pension pot is taken out in one go, with 25% usually tax-free and the remaining 75% treated as taxable income in that tax year. If you only want to encash part of the pension, the remaining pension can be left invested in a flexi-access drawdown arrangement. With drawdown, the pension remains invested, so it can rise or fall in value.

3. Which retirement income option, such as an annuity or flexi-access drawdown, is most commonly used by Attivo’s clients?

Answer: The right option depends on your personal circumstances, what you want retirement to look like, your objectives, family situation, income needs and assets. Rather than focusing on what is most popular, it is important to understand the broader picture and identify the most suitable route for the individual.

4. Is it possible to combine an annuity with a more flexible drawdown arrangement?

Answer: Yes, it may be possible to use a combination. An annuity provides a guaranteed income for life but usually offers limited flexibility, while drawdown allows flexible withdrawals and keeps the pension invested, meaning it can rise or fall in value. Whether a mix is appropriate would depend on individual needs and should be considered as part of a personal financial plan.

5. Could taking a partial annuity alongside drawdown help reduce the impact of potential market downturns?

Answer: Annuities can remove market risk by providing a guaranteed income for life, while drawdown offers flexibility but remains exposed to market movements. A partial annuity alongside drawdown may be considered as part of a broader plan, but whether it is suitable depends on the individual’s income needs, risk tolerance, assets and objectives.

6. Can one spouse’s pension pot be used to purchase a joint-life annuity for both spouses?

Answer: Yes. An annuity can be set up on a single-life or joint-life basis. With a joint-life annuity, one spouse’s pension pot can be used to provide income to that person and then continue paying an income to their spouse if they die first.

Your questions about: Pension consolidation, equity release and inheritance tax

1. What should be considered when deciding whether to consolidate multiple pensions?

Answer: Pension consolidation is common, but it is not always the right route for everyone. Consolidating can reduce administration and make it easier to track value, investments, performance and charges. However, some older pension schemes include valuable benefits that may be lost if transferred, such as enhanced tax-free cash. It is important to first understand exactly what each existing pension provides before deciding whether consolidation is suitable.

2. If someone has no dependants, could equity release from their home be considered later in life to top up pensions or investments?

Answer: Financial planning for retirement should be based on your personal circumstances, goals, assets and income needs. Equity release is an option for some, but it is a specialist area and would need personalised advice, particularly because it can affect your estate, future flexibility and long-term financial position.

3. How might the April 2027 pension and inheritance tax changes affect retirement and estate planning?

Answer: The April 2027 pension and inheritance tax changes are significant. Most private pension capital is currently outside the estate for inheritance tax purposes, but from April 2027 it is expected to be included. This is changing retirement and estate planning conversations, with more focus on using pension wealth for retirement spending and considering lifetime gifting where appropriate, rather than preserving pensions primarily as a vehicle for passing wealth on.