Options at retirement guide

The rules regarding what you can do with your pension when you retire seem to change constantly. Whilst some changes are undoubtedly for the better, the uncertainty created by constant change tends to leave ordinary people confused and frustrated. In the end, most people accept that they need some expert help.

Background

The most recent major changes in pension legislation were introduced in 2015 they gave retirees more choice and flexibility than ever before over how and when you can take money from your pension pot. 

You must have reached normal minimum pension age to access your pension pot – currently 55 (or earlier if you’re in ill health) this will rise to age 57 from 6 April 2028.

Whether you plan to retire fully, to cut back your hours gradually, you can now tailor when and how you use your pension.

This guide specifically covers the options with Defined Contribution (also known as Money Purchase) pensions.

Your retirement options at a glance

Delay - You might be able to delay taking your pension until a later date if you don’t need the money at your retirement age. Your pot then continues to grow tax-free, potentially providing more income once you access it.

Annuity - You can normally withdraw up to 25% of your pot as a one-off tax-free lump sum then convert the rest into a taxable income for life called an annuity. There are different lifetime annuity options and features to choose from that affect how much income you would get. You can also choose to provide an income for life for a dependent or other beneficiary after you die.

Flexi-Access Drawdown - With this option you can normally take up to 25% of your pension pot as a tax-free lump sum, then re-invest the rest into funds designed to provide you with a regular taxable income as and when you desire. You set the income you want, though this might be adjusted periodically depending on the performance of your investments. Unlike with a lifetime annuity your income isn’t guaranteed for life – so you need to manage your investments carefully.

Take your whole pot as cash – you can now cash in your whole pension and have the whole amount, minus tax, paid to you. Cashing in your pension pot will not give you a secure retirement income. And could result in a large tax bill.

Mixing your options - You don’t have to choose one option when deciding how to access your pension – you can mix and match as you like, and take cash and income at different times to suit your needs. You can also keep saving into a pension if you wish, and get tax relief up to age 75.

Which option or combination is right for you will depend on:

• your age and health
• when you want to fully stop work
• whether you are married and have children
• your income objectives 
• your attitude to risk
• the size of your pension pot and other savings
• any pension or other savings your spouse or partner has, if relevant.

Transferring out of a Final Salary scheme is unlikely to be in the best interests of most people

The value of pensions and the income they produce can fall as well as rise. You may get back less than you invested.

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