The dangers of taking regular withdrawals from your pension pot
Following changes introduced in April 2015 you have more choice and flexibility than ever before over how and when you can take money from your pension pot. It's important to take your time to understand your options, and get the right help and advice. What you decide now will affect your retirement income for the rest of your life.
Using the new freedoms to make regular withdrawals without keeping a close eye on the markets and their effects on your fund is a dangerous route.
When the market is low; making regular withdrawals to meet your out goings can be devastating for the long term health of your pension fund, because, when the price of the shares or fund units is low, more of them are needed to be sold to raise the required sum.
How flexible pensions will work - and the charges to expect
Selling more units will mean less income is produced naturally from dividends, which means even more units have to be sold next time to produce the same amount. The risk is your pension pot will runs dry or you will need to cut your income once you embark on this pattern of withdrawal from your fund.
Be aware of the market and cut back
A sensible solution would be to keep a close eye of the market when you make withdrawals and be prepared to reduce the amount you take if needed.
We all under estimate how long our retirement will be and how much we'll need.
Using the new freedoms in these early days, how many people will even be aware of this problem, let alone be well equipped to make the judgements about their investment portfolio. It's vital to manage withdrawals sensibly in order to keep your pension pot in good shape.
Think about using an adviser or planning tools
One solution is take care of your pension pot is to seek advice from a financial adviser or use an online planning tool. Be aware that online planning tools won't make decisions for you, it will still be down to you to decide where and how much to make cut backs if and when necessary.
Leave your pension pot untouched
Hundreds of thousands of people are in danger of taking one of the most important decisions of their lives without access to expert financial advice and guidance. Sometimes the best advice is to leave your pension fund where it is. There can be huge tax benefits from leaving your money in your pension fund, the idea is you can take your money out, not that you should take your money out. There's no rush.
You may be able to delay taking your pension until a later date. Your pot then continues to grow tax-free, potentially providing more income once you access it.
Myths around what you can/can't do with your pension
Insurers will let me use my pension like a bank account
Your pension scheme or company can stick to the original deal of offering you just an annuity. You may well have to move to a new pension provider if you want to access your savings earlier.
I can cash in my pension pot tax-free
There are growing fears that pensioners do not realise that only 25% of your pot is available to be taken tax-free. The rest will be taxed as income as it's withdrawn from your pot.
I must cash in my pot, buy an annuity or go into drawdown
Under the new pension freedom rules, you don't need to do anything with your pension. There isn't a requirement to buy an annuity or go into income drawdown. You can cash in some of your pot or all of it, but you don't have to.
Annuities will disappear
It is unlikely that annuities will disappear completely. There are reasons to suggest that they may return even stronger than ever.
My pension fund is subject to inheritance tax
Pensions are not included in your estate for inheritance tax purposes in most cases and this won't change.
I won't run out of money
It is common to underestimate how long you will live for in retirement and even if you plan carefully, you could still be in danger of running out of money.
I've got a final salary pension, so I can't take advantage of the reforms
People with final salary schemes (company pensions), commonly known as defined benefit schemes, are not allowed to take advantage of the new rules to dip into their retirement savings. But they can transfer their retirement fund into a personal pension and subsequently access their funds.
When taking small amounts of cash from your pot, you need to be aware that your pension pot won't be re-invested into new funds chosen to pay you a regular income. You also need to be aware of any tax implications.