Pension Options

Pension freedoms: what will you do with your retirement?

Whether you’re approaching your retirement age, or just getting started, it’s time to understand your pension options for your Defined Contribution pension:

  • Pension Annuity
  • Flexi-access drawdown pension
  • Take one lump sum
  • Take smaller lump sums
  • A combination

Just because you can draw on your pension at age 55, doesn’t necessarily mean that you should. Pension Freedoms rules allow retirees greater control over their pensions, but also greater responsibility.

You will need to make sure you have enough to live on throughout your retirement. And, if you have financial dependants or wish to provide a legacy, you will need to decide how you want to use your pension pot.

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But you don’t need to do this alone

Speaking to a Financial Adviser can help you understand your pension and what it means for you. Our advisers will discuss the ‘whole picture’ of your finances and personal circumstances before making a recommendation that’s specific to you.

What are my pension options?

Whichever option you choose for your retirement (or you can mix and match) it’s vital that you get independent financial advice to help you make the right decision and avoid unnecessary tax bills.

There’s more information on each of your options and how to access independent financial advice in our Pensions Freedom brochure.

Pension annuity

“I want a retirement income guaranteed for life”

Annuities provide a regular retirement income for the rest of your life.

You will know exactly how much you will receive each month, which can help you to budget effectively. However, once payments have started, you cannot cash in the policy.

Annuities are the traditional option for retirement – but no longer the only choice. There are lots of different types of annuities and choosing the most appropriate one will depend on:

  • your circumstances (including if you’d like a joint annuity with your partner)
  • your health (even if you suffer from a minor ailment like asthma, you could receive higher monthly payments with an Enhanced Annuity)
  • your attitude to risk
  • whether you wish to leave a legacy to your dependants

Flexible access to your pension pot

“I want to take my money out as and when”

With a flexible access, your pension fund can remain invested and benefit from the fund’s performance. Each time you move money into drawdown, up to 25% can be taken as a tax-free lump-sum.

While you have been building up a Defined Contribution pension pot, these funds will already be invested. As with all investments, this capital is at risk of good and bad performance. If you choose to draw on your pension funds in this way, its important that you understand the place of risk in an investment portfolio, and how market performance could affect you.

Accessing your pension flexibly will allow you to choose when and how much to take out of your pension. It will be up to you to manage your spending and ensure that you have enough income to last for the whole of your retirement.

Unlike most annuities, any money that is left in drawdown when you die can be passed on if you wish to.

Multiple small lump sums

“I want to withdraw smaller amounts when I need them”

There are lots of different ways to take money from your pension. Some pension providers will allow you to keep your pension pot invested but take out lump-sums when you need them.

How will taking money from my pension affect my funds?

You can access your pension from the age of 55 via drawdown or an annuity. However, when you draw on your funds you ‘crystallise’ them. So, what does this mean? It’s all about tax.

You can receive 25% of your pension tax free. You can either take this all in one go, and pay tax on the remaining ‘crystallised’ 75%. Or you can receive 25% of each withdrawal tax-free, leaving the remainder uncrystallised.

Taking lump sums from your pension will reduce the size of your overall fund, and potentially lessen the amount you can take in the future. However, by leaving the remainder of your pension invested, you may benefit from investment growth.

Take your pension as one lump sum

"I want to withdraw all my pension"

You don’t have to take your pension as regular income; you can choose to withdraw it and convert it to cash. You can then decide whether to purchase an annuity or reinvest these funds – anticipating further growth.

When withdrawing any amount from your pension, you should consider your tax position. Depending on your tax rate (basic, higher rate or additional rate) and the amount of income you will earn, withdrawing funds could push you into a higher tax band – and mean you are liable for more tax than you anticipated.

We would recommend that you consult an independent financial adviser before accessing your pension to prevent an unexpected tax bill or losing the tax-free advantages of pension savings.

Things to remember about your pension

You have the power to choose how you use your pension pot. It’s up to you to manage your spending and ensure that you have enough income to last for the whole of your retirement.

Of course, you don’t have to take any money from your pension pot at 55. You can choose to defer this until later, keeping your money invested so that it has the potential to grow.

You can also continue to make contributions even if you’ve begun to crystallise part of your pension to take advantage of tax efficient pension contributions.

If you’re not sure how much you’ve built up (and this isn’t uncommon, as many of our clients build up a collection of workplace pensions over time) and you’re not sure where to start, you can ask a Financial Adviser for help.

The Financial Conduct Authority does not regulate taxation advice. The value of an investment can go down as well as up. Your capital is at risk. You may get back less than you originally invested.

Accessing pension benefits early may impact on levels of retirement income and your entitlement to certain means tested benefits. Accessing pension benefits is not suitable for everyone. You should seek advice to understand your options at retirement.