Unlocking pension choices

Understanding your pension options from age 55

Since the pivotal year of 2015, a variety of options have been granted to both personal and workplace pension savers. This heightened level of flexibility, however, doesn’t alter the fundamental purpose of pension savings to support your retirement years financially.

Beginning from the age of 55 (or 57 from 6 April 2028, unless you have a protected pension age), you’re given the freedom to utilise some or all of your defined contribution pension fund to buy an annuity, withdraw cash, choose a flexible income or even combine these options. The choices available to you are determined by your pension type and what your specific pension provider offers.

The tax-free benefit and its implications
In most cases, you can withdraw 25% of your pension tax-free. Any amount above this will be taxed as income, which subsequently reduces the sum available to provide an income.

Your pension access options
Multiple lump sums

One option is to take your pension as a series of lump sums. This means you can withdraw smaller amounts from your pension pot as and when needed until it’s depleted.

Your 25% tax-free amount isn’t paid in one go – it’s received over time. Each lump sum you take is 25% tax-free, while the rest is treated as earnings and taxed accordingly.

Full pension withdrawal
Alternatively, you can opt to cash in your entire pension pot in one go. Here, 25% is tax-free, and the remaining amount is taxable.

Guaranteed retirement income (annuity)
Another option is to take up to 25% of your pension pot tax-free and then use the remaining amount to purchase an annuity. This guarantees you an income for the rest of your life, regardless of how long you live. You can also get a guaranteed income for a fixed period.

Flexible retirement income (pension drawdown)
With this option, you can take up to 25% of your pension pot tax-free and keep the rest of your pot invested to provide an income. The amount and frequency of withdrawal are entirely up to you, and you can set up a regular income if you wish. How long it lasts depends on the performance of your investments and the amount you withdraw.

Mixing your options
You’re not restricted to choosing just one of these options; you can mix different ones. This flexibility allows you to adapt to varying needs at different stages of your retirement. For instance, you could start with a flexible retirement income and switch to an annuity later for a guaranteed retirement income.

If your pension pot is large, you might be able to split it to provide some guaranteed retirement income while keeping some invested. If you have more than one pension pot, you could choose different options for each pot. Furthermore, you can continue saving into a pension if you wish and receive tax relief up to age 75. Some providers even offer products that combine two or more options.