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All your options at retirement

Managing your money effectively during retirement is really important, if it is to last a lifetime. Fortunately, new pension rules mean you can access your pension savings from age 55 onwards in a way that suits you.

How you can take your pension savings

You’ve got four options (you can mix and match these – more on this later on):

  1. leave your pension savings where they are
  2. cash in a series of lump sums
  3. take an income
  4. take all your pension savings as cash.

Not all these retirement options are available from all pension companies. But if yours doesn’t offer the option you’re looking for, you can move your pension savings to a pension company that does.

Take a look through the retirement options below and see which might work best for you.

But first, choosing what you do with your pension savings is a big decision, so you may need some help – take a look at your guidance and advice options »

1: Leave your pension savings where they are

Not made any plans to retire just yet? You can leave your pension savings where they are until you need them.

Taking this option allows you to continue contributing and your pension savings can potentially carry on growing. Don’t forget though, this is your money and you can access it at any time from age 55 onwards (age 57 from 2028).

Right for you?

Before you decide, ask yourself...

  • Can you live on the money you have now without taking your pension savings?
  • How long before you’re thinking of taking your pension savings?
  • By delaying when you take your money, will you benefit in the long term?
  • Do you have any other pension savings? How much are they worth?
  • How long until you get your state pension and how much will you get?

How much could you get?

Delaying when you take your pension savings could mean they increase in value. Remember though, the past performance of investments doesn't guarantee or act as a guide to future performance. 

You don't pay tax while the money stays in your pot. And if you die before the age of 75, your pension savings can be passed on tax-free.

Important: As with any investment, the value of your pension pot can go down as well as up. 

2: Cash in a series of lump sums

You can cash in a series of lump sums known as uncrystallised funds pension lump sums.

You can still take up to 25% of your savings tax-free and the remainder will be taxed at your highest income tax rate.

The rest of your pension savings will remain invested, so could continue to grow, and you can take more income or lump sums from it when you want to. Remember though, the past performance of investments doesn't guarantee or act as a guide to future performance.

Right for you?                                                                   

Before you decide, ask yourself...

  • How much will your pension savings be worth when you stop working?
  • Do you have any other pension savings? How much are they worth?
  • What are your other options? eg ISAs
  • How long until you get your state pension and how much will you get?
  • What effect will this have on any means-tested benefits you may be receiving?

How much could you get?


Say you're earning £15,000 a year and you have pension savings worth £30,000...


You’d like to take out £5,000 to top up your income each year as you have just moved to part-time working.

You'll receive £1,250 tax-free and the remaining £3,750 is taxed at the emergency rate (you'd need to claim back the extra tax from HMRC). Once taxed that leaves £4,400.53 – so £599.47 is paid in tax.
It's possible to save even more tax if your £5,000 lump sum is included in your personal allowance – which is £11,000 of tax-free income a year (2016-17 tax year). But in this case you're still earning £15,000 a year, so the personal allowance is already accounted for.

Important: Remember to allow for tax when you're cashing in your pension savings, at your highest income tax rate.

Annual allowance

There is a limit to the amount of money you can save into your pension across all of the schemes you belong to and receive tax relief on. This is known as your annual allowance. More on this »

3. Take an income

You can buy a regular retirement income, usually for life (called an annuity) with your pension savings when you retire. Another option is to leave your pension savings invested and take a variable income. Both options normally mean you can take up to 25% of your pension pot as a tax-free lump sum.

Important: If you’re planning to take your tax-free lump sum and pay into the same pension pot or another one, ‘pension recycling’ rules may apply and a 40% tax charge. More on this in HM Revenue & Customs' Pensions Tax Manual »

Buy a regular retirement income (an annuity)

An annuity pays you a guaranteed amount monthly, quarterly, half-yearly or yearly. Once you have bought an annuity though, your money is tied up for a set amount of time, often for the rest of your life.

There are different types of annuity available. For example, annuity payments that increase in line with inflation or at a set level over time; annuities that pay an income to a loved one after your death and annuities that pay out for a set number of years, even if you die during that time.

You can shop around for the best type of annuity and income for you. If your pension company can’t offer you a certain type of annuity, you can choose a different company. This is known as the open market option:

Useful to know: We don’t sell annuity products, so using your pension savings to buy an annuity from us when you retire isn’t an option. We can help you transfer to a company that does though – contact us when that time comes.

Right for you?

Before you decide, ask yourself...

  • How much are your pension savings worth? Small amounts may not be suitable for an annuity – estimate how much you could get with Pension Wise »
  • If you buy an annuity, your pension savings will be tied up for a set amount of time – is that OK?
  • Have you shopped around for the best annuity rate?
  • Do you want to take 25% of your pension as a tax-free lump sum?
  • Will this annuity income push you into paying a higher rate of tax?
  • Do you have any other pension savings? How much are they worth?
  • What are your other options? eg ISAs
  • How long until you get your state pension and how much will you get?
  • What effect will this have on any means-tested benefits you may be receiving?

How much could you get?

The income you get from your annuity will depend on several factors, including:

  • how much your pension savings are worth
  • your age
  • annuity rates and market conditions when you buy your annuity
  • any medical or lifestyle conditions you have, like diabetes or if you smoke
  • the type of annuity you choose, such as if the annuity is just for you or a partner as well.

If you smoke or you're in poor health, make sure you tell the annuity provider, as you may get an enhanced annuity.

Say you are 68 and decide you need a regular retirement income, usually for life (an annuity)...

You have £50,000 in your pension pot: You can take up to 25% of this as a tax-free lump sum, then the remainder goes towards paying you a guaranteed income, usually for the rest of your life.
You receive £12,500 tax-free and the income you get from this is taxed at the highest rate you pay.

Take a variable income

This option allows you to take a variable income directly from your pension pot and leave the rest of it invested.

Up to 25% of your pension pot can be taken as a tax-free lump sum. You can take any income you like and vary when you receive the income but you'll need to agree this before you get started. You pay tax on the income you receive at your highest tax rate.

Useful to know: This isn't an option with us at the moment but we can help you transfer your pension pot to a company that does offer it.

Important: Your pension pot remains invested so the amount of income available to you may rise or fall depending on how the funds your pension savings are invested in perform. Taking lump sums and income directly from your pension pot will reduce the amount you have available in the future. You should keep the funds your pension savings are invested in under close review so you can make sure they meet your needs for the future.

Annual allowance

There is a limit to the amount of money you can save into your pension across all of the schemes you belong to and receive tax relief on. This is known as your annual allowance. More on this »

There are different rules depending on which type of pension you have savings in.

4. Take all your pension savings as cash

Regardless of the size of your pension savings, you can cash in the whole amount as one lump sum.

From age 55 onwards (or 57 from 2028), you can cash in all of your pension savings and use them however you want.

You’ll receive 25% tax-free and the remaining 75% will be taxed at your highest income tax rate.

Right for you?

Before you decide, ask yourself...

  • Will you need some of your pension savings later on, like when you stop working?
  • Do you have any other pension savings? How much are they worth?
  • What are your other options? eg ISAs
  • How long until you get your state pension and how much will you get?
  • What effect will this have on any means-tested benefits you may be receiving?

Important: Remember to allow for tax when you’re cashing in your pension savings, at your highest income tax rate.

How much could you get?


If you're retiring there and then...

On top of the 25%, there’s also the matter of your personal allowance, which for the 2016/17 tax year is £11,000 – that's the figure you can earn tax-free.

If it’s a fresh tax year and your only income is your £30,000 pension savings, then an extra £11,000 of it would be tax-free. That would leave £11,500 to be taxed at your normal 20% rate, so you’d pay £2,300 in tax.

If you're continuing to work full-time...

You're earning say £28,000 a year (your personal allowance might already be covered by your salary) so the taxable part of your £30,000 pension pot would be taxed at your highest rate.

 

Next: Mix and match your options