What are my retirement options?


Whether you're young and starting to save for your retirement, or are fast approaching pensionable age and want to be in the know, understanding the options that are open to you when you retire can make the difference between enjoying a stress-free retirement and working longer than you'd otherwise desired.

Don't do anything

If you have other means of income that will allow you to live quite happily for some years after you reach retirement age, then consider simply leaving your pension pot alone – if you enjoy working, do so.

The potential for growth on a large pension sum could translate into thousands of pounds being added to its value each passing year, affording you a greater degree of financial security and an improved quality of life in your old age. You can choose whether you'd like to stay with your current pension provider and product, move it to another, or control the investments made with it yourself.

Those who choose to defer their State Pension can also enjoy boosted pension returns. Pre-April 6th 2016 State Pensions increase 10.4% every year that's deferred, while those getting the New State Pension will see it increased by just under 5.8% per annum. The same goes for those with defined benefit pension schemes – the income will increase each year it's deferred.

Withdraw it

You need to think carefully before withdrawing a lump sum from your pension. You can usually withdraw up to 25% of the pension pot tax free (although some providers will allow you to take more, the rest will be taxed at your marginal rate of income tax) Known as a pension commencement lump sum (PCLS), you could use this money to make investments, to live off or to pay off debts that might affect your later life. Make sure you know how much tax you’ll be paying on any lump sum withdrawals above your 25% tax free amount, and be sure that the sum doesn't push you into a higher tax band, or you'll lose more of your money. 

You could choose to withdraw a large portion of your pension pot at once, but as well as the risk of paying too much tax, this is an option that only those with investing experience and a sureness of getting a return should consider

The preferred option for most people who want to keep their pension pot invested, but still want to withdraw money gradually to live on, is known as income drawdown. Here, the pot is left to grow, but you can take as little or as much out as you wish. These withdrawals are taxed at your marginal rate of income tax, as you will have already taken your tax free allowance.

If you don’t withdraw your 25% tax-free allowance up front, it is possible instead to withdraw money in several lump sums, or a regular income, with 25% of each payment being tax-free and the remainder taxed at your marginal rate of tax. These are called ‘uncrystallised funds pension lump sum’ payments (UFPLS).

Purchase an annuity

An annuity is a guaranteed income. Many pensioners will purchase one with all or a portion of their pension cash, after which they're then paid an income by the annuity provider until they pass away.

Different pensions offer different monthly or yearly payment rates, so it's very important that you shop around for the best deal – pension money can only buy an annuity once. 

Thanks to government legislation, pensioners contemplating an annuity can take advantage of being able to withdraw up to 25% tax-free lump sum from their pension pot, using the remaining pension pot to purchase an annuity.

If you have a defined benefit pension scheme, you will automatically begin receiving your income at an age specified by your particular plan. However you may be able to take it earlier or later and if you want to do this speak to the Trustees.

Nowadays there are plans available that allow to take your pension in a number of ways to suit your needs – for example, using part of your pension pot to buy an annuity, while investing the rest in pension drawdown. The Retirement Account, provided by Retirement Advantage, is an example.

Pensions can seem rather confusing, but they needn't be. Understand your options, shop around and ensure your retirement is as secure as possible.

Return to Retirement Planning home.