Looking forward to a secure and financially independent retirement

It’s good to have choices when it comes to pensions and your retirement, but it’s also important to understand all your options from age 55 onwards.

With the money in your pension pot, you could buy an annuity, take some while leaving some invested, take it all at once, leave it all where it is, or a combination of these. Whatever you do, 25% will be tax-free with the rest subject to tax.


Buying an annuity – a guaranteed income for life

One of the options when it comes to what you do with your pension savings is to buy an annuity. There are a number of different types but they all pay a guaranteed, monthly, quarterly or annual sum until you die or for a fixed amount of time.

With an annuity:

- you know how much you’ll be getting and when

- you could be paid an income for the rest of your life

- there are a range of annuities to choose from

- once you’ve bought an annuity, you’re locked in

Annuity options

Lifetime Annuity

Lifetime Annuities provide you with a regular income for as long as you live. Your initial level of income will be based on some or all of the following factors:

- your age

- how long it is estimated you will live

- your health and lifestyle

- where you live

With a standard annuity, the annuity rates (and therefore the income you get) are based on the normal life expectancy of people of the same age as you.

With an enhanced or impaired life annuity, if you have a qualifying medical condition or lifestyle factor that may lower your life expectancy, you could get payments as much as 50%[1] higher than you might get from a standard annuity.

[1] Source – Which? website, October 2014

Whatever type of lifetime annuity you qualify for, you then have options about how the annuity is set up.

These include:

Level or Escalating/Index- Linked Annuity

You can choose for the income you receive to remain the same throughout your lifetime. Although this might provide a higher starting income, it does mean that the value of your income will be worth less in real terms over time due to the effects of inflation.

You can instead choose for your income to increase each year, either at a set percentage or in line with inflation.

This helps to reduce the effects of inflation and maintain your buying power. However, it does mean that your starting income will be lower than if you chose a level annuity. It can prove good value if you live a long time.

Guaranteed period

You can choose for your income to be paid for a guaranteed period of time – say 10 years. If you die during this period, the income will continue to be paid out until the end of the guaranteed period. If you live longer than the guaranteed period you have chosen, your income will continue to be paid for the rest of your life. This option is usually inexpensive, and although it will reduce your income, it shouldn’t be significantly lower.

Joint Annuity

You can choose to include an income for your spouse, registered civil partner or other dependant when you die. The amount they get is likely to be an agreed percentage of your annuity income. Choosing this option will reduce the income that you get, and the higher the percentage you pass on, the lower your annuity income will be.

There are also other types of annuities available, such as:

Fixed-term Annuities

This type of annuity gives you an income for an agreed amount of time, usually between three and twenty years. It may also pay a specified ‘maturity amount’ when it ends, which can be re-invested in another retirement plan.

Investment-linked Annuities

Investment-linked annuities invest in a range of investments, which means the value of your fund and the income you receive from it can go down as well as up. They do not provide a guaranteed level of income for life – the amount you will receive will change depending on the performance of the underlying investments.

Flexible access to your pension pot

From 6 April 2015, you can access your pension savings as and when you like, taking however much money you want.

With flexible access to your pension pot, you could:

- take your varying amounts of money

- take 25% of it tax-free

- leave the rest invested so it can potentially grow

- pass on the money left when you die

- deplete your pension pot if you don’t budget properly

Two flexible options

There are a couple of flexible options for you to think about. They both allow you to take 25% of the money in your pension pot tax-free, but the way you do this is very different.

Flexible income drawdown

With flexible income drawdown, once you’ve taken your 25% tax-free allowance, the remainder of your pension pot is held within a drawdown plan. If invested, it will have the potential to continue to grow, adding to your retirement fund.

When it comes to taking your money out, you could arrange for a regular income, take it when you need it, or a combination of the two. There’s no limit to the amount of your pension pot you can take, but what you do draw will be subject to tax as you get your 25% tax-free allowance up front.

New rules will simplify the existing regime and come into force from April 2015, abolishing the 55% tax that applies to untouched defined contribution pension pots of people aged 75 or over, and to pensions from which money has already been withdrawn.

Partial Pension Encashment

Whatever you choose to do with your pension pot, 25% of what you’ve got is tax- free. With Partial Pension Encashment (PPE), you take a portion of your tax-free allowance every time you take money, so 25% of it is tax-free and the other 75% is taxed. By only taking as much money as you need when you need it, the rest of your pension pot is left invested and can potentially continue to grow. You can also continue making payments into it.

Each time you take a PPE, you may have to make a separate application, in which case this may not be the most convenient option if you’re looking to be paid a regular income. If you die with money left in your pension pot, it will go to your dependants and will not usually be subject to tax.

Take your entire pension pot

From 6 April 2015, you’ll be able to take your entire pension pot at once from age 55. This gives you total control of your money, and 25% can be taken as a tax-free lump sum.

Until then, if you are aged 60 or over and either of the following conditions apply, you can take it all as a cash lump sum if:

- the total value of your pension savings is £30,000 or less

- you have pension pots of £10,000 or less. This can be done a maximum of three times for personal pensions and unlimited times for occupational schemes, and is allowed even if your total pension savings exceed £30,000

Leave your money for now

In the event that you do not need the money just yet, you might want to consider leaving your pension pot invested. Your pension pot has the potential to keep growing until you’re ready to take it and you can continue to work – it’s your decision when to stop.