Your retirement options

A single cash lump sum

You can choose to take all of the money that you have saved in your Pension Account as one-off cash lump sum at retirement. The first 25% would be tax-free and the rest would be taxable as income. You do not have to stop working to take this option but you need to plan how you will provide an income when you stop working.

You should also consider the following points: 

  • On average, people aged 55 today will live to their mid-to-late 80s, so it is important to consider how you will provide a future income for yourself if you take your whole Pension Account as a lump sum.
  • There will be tax implications if you take your entire Pension Account as cash in one go. These will depend on your personal circumstances and you should consider the impact of taking a lump sum on the tax you pay as when this is combined with your other income, you may be pushed into a higher tax band. If you are concerned about this, you may wish to consider taking a series of lump sums over 2 or more tax years (see below). 
  • You should also consider whether taking your benefits as a one off lump sum will affect how much you can save into a pension in the future as your Annual Allowance (AA) will reduce from the current standard of £60,000 to £10,000 for savings to a DC arrangement.
  • If you plan to invest your lump sum somewhere else, for example into an ISA or other financial product that is not a pension; you should check the charges and tax implications of this compared with leaving it invested in the Scheme.
  • Taking cash lump sums may have implications for people with debt or who may be entitled to means-tested benefits. If you are concerned about this aspect, you can contact the Citizens Advice Bureau or the Pension Wise service provided by MoneyHelper.

If you take your benefits in this way, no further benefits would be payable from the Scheme.

A pension for life (an Annuity)

When you retire, your Pension Account can be used to buy an annuity from an insurance company. In exchange for the value of your Pension Account, the insurance company will agree to pay you a guaranteed income for the rest of your life. You still have the option to take 25% of your Pension Account as a tax-free lump sum and the remainder can be used to buy an annuity, which would be taxable. 

You will need to choose what type of annuity you buy, for example whether it will increase each year, and whether it will pay an income to your spouse or lump sum in the event of your death. If you have a medical condition, are in poor health, smoke, are overweight, or even if there is a family history of certain medical conditions, you may be able to get a significantly higher income through taking an ‘enhanced annuity'.

The Trustee will make available to you the services of Hargreaves Lansdown, a company that specialises in selecting annuities across the open market to help you obtain quotations appropriate to your individual circumstances on retirement. To find out more about the service offered by Hargreaves Lansdown, please click here. You can also use your own financial adviser if you wish.

A flexible income (drawdown)

This option is not available through the Scheme so you would need to transfer your Pension Account to another approved pension arrangement and take a flexible income (also known as drawdown) from there. Once transferred your money remains invested, which may give your pension more chance to grow, but it could go down in value too. 

Under a drawdown arrangement, you can take your 25% tax-free lump sum and then draw an income each year. Any income you draw will be taxable.

You should also need to consider the following points:

  • As with every investment, there’s the risk that the value may go down as well as up.
  • If you are considering this option, you should think about how much you take out every year and how long your money needs to last. If too much money is taken too quickly, the available retirement income could fall drastically or even run out, especially if financial markets fall and the value of your investments fall as a result.
  • Charges can also reduce the amount of money you can receive so you should check whether there are any charges or other reductions when you take money from it. Providers and schemes may also make ongoing charges on any money left in the account, so it’s important to consider the impact of these charges as well.
  • Different schemes and providers offer different types of flexible retirement income so you need to check what kind of drawdown is being offered. Some might have products where part of your income is guaranteed but charges and conditions will apply. People considering a flexible retirement income should shop around – an FCA-regulated financial adviser will be able to help with this.

A series of cash lump sums (also known as Uncrystallised Funds Pension Lump Sum or UFPLS)

This option is not available through the Scheme so you would need to transfer your Pension Account to another approved pension arrangement and take lump sums from it as and when you need them. Each time you take a lump sum, 25% of it is tax-free and the rest will be taxable.

You should also need to consider the following points:

  • You will need to consider how much you take out every year and how long your money needs to last.
  • Any money left in your pension would remain invested, which may give it a chance to grow, but it could go down in value too.
  • You should consider your own personal tax circumstances, and the impact of taking taxable lump sums on the tax you pay, as when they are combined with your other income, you may be pushed into a higher tax band than normal depending on the amount withdrawn.
  • Charges can reduce the money received so you should check whether there are any charges or other reductions when a lump sum is withdrawn. Charges will continue to be taken from any money left in your account, so it’s important to consider the impact of these charges.
  • If you plan to take cash and invest elsewhere, you will need to check what the charges are before you cash in your pension.
  • Taking cash withdrawals may have implications for people with debt or who may be entitled to means-tested benefits. If you are concerned about this aspect, you can contact the Citizens Advice Bureau or the Pension Wise service provided by MoneyHelper.

A combination of options

You don’t have to choose one option when deciding how to take your Pension Account. You can transfer it to another HMRC approved arrangement and choose to take it using a combination of more than one of the options outlined above over the course of your retirement. If you have more than one pension with different pension arrangements, you can use different options for each pension. Some pension providers or advisers can offer you an option that combines a guaranteed income for life with a flexible income. It’s important to take advice to ensure the option or combination is right for your personal circumstance.

Advice and guidance

If you are over the age of 50, Pension Wise is a free and impartial service from MoneyHelper that provides you with help understanding your pension choices. To access the guidance, you will need to book an appointment with Pension Wise. This appointment will be face to face, by telephone or by another method that you agree with them. At this appointment they will explain the flexible pension options available to you and how they are taxed, to help you to decide which option is best for you.

It’s easy to book your free Pension Wise appointment online at www.moneyhelper.org.uk/pensionwise You can also book an appointment by phone, please use this link to find more information. 

If you are under the age of 50, you won’t be able to book a Pension Wise appointment, but can still use MoneyHelper to help answer any questions that you have about your pension. Find out more from the MoneyHelper website at www.moneyhelper.org.uk

If you are considering transferring your Pension Account to another arrangement, please read the information on how to spot a Pension Scam, please click here.

The way in which you choose to take your benefits can reduce the amount you can contribute to a Defined Contribution (DC) pension while still getting tax relief. You can read more about current tax limits by clicking here.