Retirement planning made easy
Retirement planning made easy

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Retirement planning made easy

5 Your pension options

To understand how you can use your pension savings, you need to know your options for using the pension pot(s) you have built up. The number of options available has increased since 2015 following new rules introduced by the UK government.

The figure is a photo showing a couple with their grandchild who is sitting on the shoulders of her grandfather.
Figure 4 There are now more options for drawing from your pension pot.

Your options with a defined benefit pension

A defined benefit (DB) pension will pay you a regular income until you die. For defined benefit pensions you can:

  • take a tax-free lump sum of up to 25% of the value of your pension benefits
  • take a pension income which is based on the number of years you worked for the organisation and your final pay or average pay during your time in their pension scheme.

You can opt to turn your defined benefit pension into a defined contribution pension, but this is usually not a good financial choice. You’ll be giving up a regular income that could be essential for your financial security in retirement. Although you may be offered what might seem like a large cash sum to switch, it’s usually far less than it would cost you to obtain the annual income that the defined benefit pension would have provided. If you are considering this, you should talk to a financial adviser. Certainly, you have to talk to an adviser for giving up a defined benefit pension whose value, if converted into a lump sum, is £30,000 or more.

Your options with a defined contribution pension

For defined contribution pensions, the options for those aged 55 years or more are:

  • Take up to 25% of the pension pot tax-free.
  • Use the pot to provide a guaranteed income for life through what is known as an ‘annuity’.
  • Have a guaranteed income which provides an income for a set number of years. Some of these products offer a maturity payment which is agreed at the start and can then be used to purchase another retirement product.
  • Leave your pot invested and then withdraw money as required (known as ‘drawdown’).
  • A combination of the above.
  • Or alternatively, you could ‘cash in’ the pension pot and take it as one lump sum (although if you do this you need to have a clear plan for how you will provide yourself with an income in retirement).

Also, don’t forget you could simply leave your pension pot untouched and allow it to build up further before you draw on it. Clearly this is only an option if you have other sources of income in the interim – for example by continuing to work or by drawing on any non-pension savings.

Taking financial advice

As these decisions are important and will affect your income in retirement it’s a good idea to talk to an expert, a financial adviser, especially if you have a larger pension pot to invest. They can ensure that you’re aware of all your options, their pros and cons, and, importantly, their tax consequences. They can also advise on whether you should combine a number of small pension pots into one larger pot as this might improve the pension income you receive – for example by getting a better annuity.

Do make sure your adviser is regulated – you can use unbiased.co.uk [Tip: hold Ctrl and click a link to open it in a new tab. (Hide tip)] to find one. Open the link in a new tab or window so that you can easily return to the course.

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