Finance

Guide to Making the Most of Your Pension

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How to turn your pension savings into an income for life.

There are many things to consider as you approach retirement. It’s good to start by reviewing your finances to ensure your future income will allow you to enjoy the lifestyle you want.

The earlier you start thinking about what you’ll need for a comfortable retirement and where your money is going to come from, the more control you can have over that period of your life.

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Free Guide: Trusts

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How much tax will you pay on your pension pots?

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Since 2015, individuals over the age of 55 with defined contribution (DC) pension pots have enjoyed full freedom to decide how to manage their pensions; purchasing an annuity (a guaranteed income for life) is no longer mandatory. More than 221 people fully withdrew a pension pot of £250,000 or more between October 2022 and March 2023[1], resulting in a tax bill of at least £97,500 each[2], according to new analysis of FCA figures.

Following the reduction of the 45p rate of tax from £150,000 to £125,140 from April 2023, a pot of £250,000 withdrawn in the current tax year (2024/25) would lead to a tax bill of at least £ 8,700 each – over £1,000 more. In the same period, October 2022 to March 2023, 1,537 people fully encashed a pot of between £100,000 and £24 ,000, leading to a minimum £27,400 tax bill for each person.

Someone fully withdrawing a pot of £174,500, the middle point of that range, would have paid at least £63,500 in 2022/23 and a minimum of £64,700 now. These figures only consider the pension – people with other sources of income at the time of withdrawal would pay even more tax.

Paying significant amounts of tax to access pensions

This is because when people fully encash their pension, HMRC taxes anything above their 25% tax-free pension cash as income, subject to the LSA position of the individual, so it’s taxed like an ongoing salary. The analysis shows there are hundreds of people out there paying significant amounts of tax to access their pensions.

It’s impossible to know whether their circumstances warranted them being subject to a big tax hit, but for most people, it’s something you’ll want to avoid.

It’s important to remember that most pension income is subject to tax, like other income. Fully encashing a large pot will almost always mean a very large tax bill, sometimes taking away many years’ worth of savings. Often, when people fully withdraw their pension, it is simply to move the money to their bank account. Not only does this mean their savings become eligible for tax, but they’re also potentially giving up investment returns.

Withdrawing retirement savings more tax-efficiently

The good news is that there are ways to make withdrawing your retirement savings more tax- efficient, and it’s possible to spread your withdrawals over many years, which can be more efficient. Taking just one option at retirement, such as cash or an annuity, could mean you miss out on an opportunity to maximise tax efficiency and consider your financial needs in the round.

It’s worth considering a ‘mix and match’ approach to your retirement income, which could help you achieve the best of all worlds – you could, for example, annuitise a portion of your pension fund to cover essential outgoings and leave the rest in drawdown to access as and when you need it. Annuitising is the process of converting a lump sum of money into a stream of regular payments that are made over a specified period of time. Be sure to speak to your pension provider about your options, and we’d strongly recommend seeking advice or guidance when taking your pension.

How much tax will I pay on my pension pots?

First, most individuals will receive 25% of their pension pot tax-free, while the remaining 75% is taxable. The amount of tax payable on that 75% depends on factors such as your tax code, the amount you withdraw at a time and whether you have any other income sources.

It is important to remember that the total amount you can typically take tax-free across all your pension pots is now £268,275 unless you have specific protections in place. Most people cannot access their pension pots until they reach age 55 (rising to 57 on 6 April 2028).

Understanding your personal allowance

Everyone is entitled to a tax-free Personal Allowance each tax year, just like when working. For the 2024/25 tax year, the Personal Allowance is £12,570, which has been fro]en at this level for several years. Any amount above this will be taxed as earned income according to your tax band. The simplest way to avoid paying excessive tax is to ensure you do not withdraw more from a pension pot than necessary. Taking it in small, regular amounts could help keep your tax bill down.

Remember, you only pay Income Tax on anything over your Personal Allowance. Therefore, if a pension pot is your sole income source, you could withdraw
£12,570 from it each tax year without paying any tax. Conversely, taking large lump sums in the same tax year (outside of your 25% tax-free entitlement) could push you into a higher tax bracket.

Combining tax-free with taxable withdrawals

You do not necessarily need to take all of your tax-free lump sum at once. Often, you can take it in chunks over several months or years, provided your pension plan allows this. For instance, you could withdraw from the taxable portion of your pot and top it up with some of your tax-free amount.

Exploring ISAs as an income source

Unlike your pension pots, savings in your Individual Savings Accounts (ISAs) are generally not taxed upon withdrawal. You can contribute up to £20,000 in the 2024/25 tax year (across all your ISAs) and will not pay tax on withdrawals or gains. If you have savings in an ISA, consider using them to supplement your pension income to help reduce your tax burden. Alternatively, you could use your ISA to cover your entire retirement income before touching your pension.

For some, the early years of retirement can be more costly, necessitating a higher income. Hence, using tax-efficient withdrawals from your ISA to cover this period might be sensible. As you age and settle further into retirement, your expenses may decrease. Perhaps you have paid off your mortgage, enjoy less expensive hobbies or your children no longer rely on you financially. This could mean you can eventually afford to live off a more modest pension income, thus reducing your tax liability.

Ready to discuss how to manage your pension efficiently?

For further information and personalised advice on managing your pension withdrawals efficiently, please contact us so we can guide you in the most appropriate way for your unique situation.

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Source data:

  1. Retirement income market data 2021/22 FCA
  2. Calculated using Which’s tax calculator, Income Tax calculator and salary calculator for 2024/25, 2023/24 and 2022/23 – Which? Figures rounded to the nearest £100.

Your 50’s – the crucial decade for financial planning and advice

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If you have not considered financial advice before, your 50s is the time to do so. 

Now is the time to check in on your 

  • Retirement resources 
  • Pensions and contributions 
  • Savings & Investments in the best place at the right risk level 
  • Tax position 

We use sophisticated cashflow software to model your desired retirement plan and identify the gaps and adjustments needed. 

In your 50s and looking for a retirement review? 

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The importance of drafting a Will

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Protect your family from uncertainty and potential conflicts

Many people still lack a properly organised estate plan despite the numerous benefits of writing a Will—such as getting our finances in order, planning our legacy, and ensuring that our loved ones are well looked after.

By taking the proactive step to draft a Will, you can protect your family from uncertainty and potential conflicts, ensuring that your legacy is preserved according to your exact intentions. If you haven’t done so already, now is the time to prioritise this important task and secure the future for those you care about most.

A way to get assets in order

Making a Will often prompts a financial review. It typically identifies gaps in people/s financial planning – often inadequate life assurance or disability income benefit cover. If they’re in an occupational pension scheme, they may need to update their nomination of beneficiaries form. Without a Will, Intestacy laws determine who inherits your estate and in what order.

If you don’t have a valid Will, then effective state legislation steps in and provides a series of rules with you may not wish to apply to your assets and your family. It’s also relatively inexpensive compared to the problems you can create for your family without making a Will.

Specifying sentimental gifts in your Will

We dedicate much of our lives to working hard to provide for ourselves and our loved ones. As we accumulate assets and cherished possessions over time, it becomes crucial to ensure that they are distributed according to our wishes when we are no longer around. Importantly, the gifts mentioned in a Will do not need to be limited to property or cash. This can also include sentimental items with significant emotional value but less material worth, These could be family heirlooms, personal mementoes, or any treasured possessions that we wish to pass down to future generations. By specifying these sentimental gifts in our Will, you ensure that these meaningful items are handed down to those who will appreciate them most.

Leave money to a good cause

While family and friends are likely to be the first considerations when writing a Will, many people also take the opportunity to give a helping hand to causes close to their hearts. For many charities, gifts in Wills account for a significant amount of their income. Without these legacies, much of their work would not be possible. Leaving money to charity could also cut your Inheritance Tax bill.

Some charities will even help you write a Will if you leave them a donation. By leaving 10% of the value of your estate to a charity, you could reduce Inheritance Tax payable on some of your assets from 40% to 36%.

You choose the legal guardians

A Will allows you to appoint one or more legal guardians for children aged under 18. Your chosen guardians will take over the role of bringing up the children on your behalf. This ensures you remain in control and entrust this significant responsibility to people you deeply trust. In addition, having a Will grants you the peace of mind that comes with knowing your children’s future is secured. By choosing guardians, you ensure they are cared for by individuals who share your values and vision for their upbringing.

You choose the executors

Choosing your own executor, the individual responsible for implementing the terms of your Will, can ensure that your estate is distributed by someone you trust. You can appoint people you know and rely on to be your executors and manage your estate. Alternatively, you can appoint professionals to serve as your executors. An executor plays a crucial role in managing your affairs posthumously, ensuring that your wishes are carried out accurately and efficiently. This includes settling debts, distributing assets, and handling other legal matters related to your estate.

“TAKING OUT A LIFE INSURANCE POLICY CAN FURTHER ENSURE THAT YOUR FAMILY IS FINANCIALLY SECURE. LIFE INSURANCE CAN SERVE AS A SAFETY NET, PROVIDING FINANCIAL SUPPORT TO YOUR LOVED ONES IN THE EVENT OF YOUR PASSING.”

You ensure partners are looked after

There’s a common misconception that the rules provide for a ‘common-law’ husband or wife. If you’re unmarried or in a registered civil partnership and don’t have a Will, your partner won’t inherit anything under the laws of intestacy. A Will ensures that couples who live together but aren’t married or in a registered civil partnership can leave their assets to each other. Taking out a life insurance policy can further ensure that your family is financially secure. Life insurance can serve as a safety net, providing financial support to your loved ones in the event of your passing.

A Will should be updated

A Will should be reviewed at least every three years and whenever there’s a significant live event, such as the birth of a child or when children become adults. Keeping your Will up to date ensures that it reflects your current wishes and circumstances. Amending a Will is straightforward – you can rewrite parts of it with something called a codicil. This allows you to make minor adjustments without drafting a completely new document.

Peace of mind

Making a Will can relieve a considerable burden on your mind. Completing a properly-arranged Will provides peace of mind, knowing that your assets will be distributed according to your wishes. Writing a Will places you in the driver’s seat for many important decisions, impacting not just your life but also those of your family and friends.

Once written, many people feel great relief, especially when they can cross it off their ‘to-do’ list. However, remember to update it as needed to ensure it remains relevant.

Looking to draft or update an existing Will?

Please contact us for further information on drafting a comprehensive Will and safeguarding your legacy for future generations. Whether you’re just beginning the process or looking to update an existing Will, we’ll help you navigate every step confidently and easily.

Find Your Local Adviser

Why is it important to have a Will?

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By taking the proactive step to draft a Will, you can protect your family from uncertainty and potential conflicts, ensuring that your legacy is preserved according to your exact intentions. If you haven’t done so already, now is the time to prioritise this important task and secure the future for those you care about most.

If you’d like to speak to us about your family’s financial future, get in touch to find your local adviser:


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Why it’s important to review your current workplace pension

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Arguably one of the most important benefits you will provide your employees is a workplace pension so it is crucial you have the right pension scheme in place for them. The choices you make will have a significant impact on their long term financial well being.

If you would like to review your current workplace pension, please get in touch to find your nearest Ellis Bates Financial Adviser

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Financial Advice for Business Owners Video

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As a busy employer, you need fast access to expert financial advice and financial services to help you both build and protect your business at the same time. You want to make the most of every financial opportunity whilst ensuring your assets are future-proofed.

Pension Reviews

Regular pension reviews are imperative, as fees, benefits and enhancements can change markedly over time and as Independent Pension Advisors, we search the whole marketplace to ensure you and your employees maximise pension investments.

If you’d like to discuss how Financial Advice could benefit your business, please get in touch

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Group Pension Schemes

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Arguably one of the most important benefits you will provide your employees is a workplace pension so it is crucial you have the right pension scheme in place for them. The choices you make will have a significant impact on their long term financial well being and we are here to guide you through the entire process.

Ellis Bates have over 4 decades of experience in successfully delivering defined contribution workplace pensions, offering you the employer a wide range of choice and flexibility, whether its setting up a new scheme or reviewing and replacing your existing scheme.

Why it is important to review your current workplace pension

Regular reviews are imperative, as fees, benefits and enhancements can change markedly over time and as independent pension advisers we can search the whole marketplace to ensure you and your employees maximise pension investments.

Limited access to information, coupled with a lack of transparency from some pension providers often makes it difficult for employers to make a well informed decision about the most appropriate type of pension scheme to offer their employees, which can impact an individual’s savings and retirement.

Master Trust Schemes

A master trust scheme, also known simply as a master trust, is a type of pension scheme that provides retirement benefits to employees or members of multiple, unrelated employers. It is a form of occupational pension scheme that allows multiple employers to pool their pension assets and administration resources within a single trust structure. This structure can offer certain advantages, such as cost savings, improved governance, and potentially more efficient investment management.

Examples of master trusts are auto enrolment schemes such as NEST and People’s Pension, which historically offered a quick, off-the-shelf option to ensure companies could comply to the Government’s auto enrolment requirements when introduced in 2012.

These standard schemes not only belong to a master trust but are also referred to as ‘fixed’ schemes as they ‘fix’ an employees retirement age and then typically adopt a ‘Lifestyling’ investment strategy as their default.

With Life-styling, as employees approach their retirement age, pension savings are gradually and automatically moved from ‘higher risk’ assets such as global and UK equities into ‘lower risk’ asset classes such as fixed interest and cash.

Legislation changes
Pensions Freedoms 2015

The Government then introduced the Pensions Freedoms in 2015, to allow much greater flexibility in both managing and accessing defined contribution pension pots. Initially, these freedoms came into force for pension savers from the age of 55, but from April 2028, this will rise to 57. The legislation brought in much greater flexibility and choice for individuals and employers, particularly with regards to accumulation and decumulation.

Accumulation and decumulation are terms often used in the context of retirement savings and pension plans. They refer to the stages of building up retirement savings (accumulation) and then using those savings to generate retirement income (decumulation). Flexibility in these stages was seen as important to cater to individuals’ varying financial needs and preferences.

Flexibilities in Accumulation

Contribution Levels: individuals should have the flexibility to contribute varying amounts to their retirement savings based on their financial situation, goals, and age. Some pension plans allow members to adjust their contribution levels periodically.

Investment Options: providing a range of investment options allows savers to tailor their portfolios to their risk tolerance and investment preferences. Flexibility in investment choices can help them align their portfolio with their retirement goals.

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5 Financial Planning Conversations for you and your Family

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Discussing finances can evoke anxiety or discomfort, and this tension doesn’t ease when family members are involved..

How can you make financial planning conversations go smoothly?

  • Your Estate

Discussing who will inherit will help you avoid future disagreements, ensure your Will is up to date and minimise inheritance tax liabilities

  • Succession Planning

Building a succession plan that suits your needs ensures you have laid the firm foundations for your family’s future

  • Lifetime Gifting

It’s possible to gift tax-efficiently during your lifetime using various allowances and exemptions

  • When I’m gone Information

Discuss where you’ll safely leave basic details of your bank accounts, savings, investments, and utility providers

  • Power of Attorney

You can put in place a power of attorney, a legal document enabling you to name one or more people to look after your affairs if you lose capacity

If you would like to discuss your family’s financial future and how we can help, please get in contact

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