Approaching retirement

From the age of 55 you can access your pension savings.
Let’s start by understanding the options for accessing your pension pot.

Approaching retirement graphs

Some things to think about

How much money you will need in retirement?
This will depend on things like the impact inflation will have on what your money can buy, if you intend to keep working, changes to your lifestyle and how long you will live.

How much tax you might pay?
More choice over how you take your pension means that you need to carefully consider your tax circumstances. Some of your pension pot options might change the tax bracket you fall into.

How much you want to leave behind?
Some options let you leave either an income or a lump sum to your loved ones, when you die.

So what are your options?

Your choices give you the opportunity to plan for your retirement and look to your future with confidence. All that choice can often mean increased confusion. So let’s take a clear look at the options available to you, and what they might mean for your money in retirement.

We don’t necessarily offer products on each of the options listed below. So, depending how much you have in your pension pot and what you want to do, you may need to use another provider or move your money into a new product.

This information is intended to guide you through your options. We won’t recommend one option over another, but we’re here to support you as you make your decision.

Dip in and out

Take up to 25% as a tax-free lump sum, then dip into the rest later. This is sometimes called “drawdown” and allows you to take a cash lump sum at the start and then you get to decide how you want to use the rest. You have the choice to dip into it as and when you need, while the rest stays invested how you'd like.

As soon as you take out more than the tax-free entitlement, it will count towards your taxable income for the year, along with any salary, benefits, State Pension or anything else you could pay tax on. However you can take your money over a number of different tax years to help keep you in a lower tax bracket.

The amount of tax you pay will depend on your individual circumstances.

You could also set it up to pay you a regular income (a bit like a salary), if you prefer. Whichever way you take your money, particularly if it’s your main source of income, you’ll need to plan it out carefully so you don’t run out of money and need to rely on other kinds of income.

For example

Pension pot size at age 60:

£50,000

Take 25% tax-free cash as a lump sum

£12,500

Leave the rest invested in drawdown:

£37,500

If left untouched until age 65, your drawdown pot could be worth around:

£43,560

If left untouched until age 70, your drawdown pot could be worth around:

£50,600

OR, if you want to take an income from age 60:

Take 25% tax-free cash at the start:

£12,500

And then take the same amount each year:

£2,400

So your pot could last for:

21 years & 1 month

Example is based on a 20% tax-rate and a Personal Allowance of £11,500 for 2017/18. No other income is taken into consideration. When added to other income for the year, the amount of tax to pay could be at a higher rate.

The investment growth on the amount left invested is calculated at 3% per year. It does not include charges which may apply.

This is not an indication of what you may get in the future and is not guaranteed.

The actual amount you receive and the amount of tax you may need to pay will depend on the option you choose and your individual circumstances.

Benefits

You can decide when and how you take your money.

Any money left in your pot when you die can be passed on to your family.

You can choose where your remaining funds are invested.

If you wanted, you could purchase a guaranteed income, (also known as an annuity) at a later date.

Potentially tax efficient if you take your money in stages.

 

Considerations

Depending on your tax situation, any money you take over your tax-free cash could still push you into a higher tax-bracket.

If you take out too much money, you may run out and need to rely on other income.

Any money left is still invested, meaning the value can go down as well as up. So you may not get back what you've put in.

You will still have to pay charges on the money left invested.

You may lose any existing guarantees you have on your pension.

A few things you need to know

Let’s go shopping.
When deciding what to do with your pension pot you should be aware that different providers offer different products that may be more suited to your individual circumstances. Each product option could also have different tax implications. Their rates, investment funds, charges and terms may also be different.

For example, with an annuity they might use different criteria to assess you or your partner’s health and/or lifestyle conditions, this is often called an enhanced annuity. This might mean that you could get a higher level of income elsewhere.

This is why it’s important to shop around - so that whatever you decide to do, it’s the right decision for you.

Some money matters.
If you claim any benefits that are based on your income or savings, like housing benefit or income support, you might lose some or all of those by taking a big lump sum or if it is considered you have spent it unwisely.

You may also have certain debts where the creditor has a right to any cash you take (e.g. bankruptcy), so you might need to use the money you get to pay them off. You should speak to the relevant agency before making any decision.

If you have a pension with guaranteed benefits of £30,000 or more, legislation requires you to take financial advice when looking to convert into a flexible option, such as taking the whole pension pot as cash or as flexible income.

Let’s talk about tax. You should know that tax rules can change.
If your pension provider doesn’t hold your tax code, then the first payment you take could be subject to Emergency Tax. If you've already made plans with the money, Emergency Tax could reduce this and you may initially end up with less than you thought you would get. If you pay too much or too little tax, it's your responsibility to check you've paid the right tax with HMRC.  Our Emergency Tax calculator can show you just how much Emergency Tax you could end up paying.

If you have a defined contribution scheme (where you and/or your employer make regular contributions), taking money out of your pension pot sometimes triggers a limit on how much can be paid into it in the future. This is called the Money Purchase Annual Allowance. Our Questions & Answers guide can give you more details.

If you are unsure what might be the best option for you, speak with a financial adviser.

An income for life

This is also referred to as an annuity. This option normally allows you to take up to 25% as an initial tax-free, cash lump sum and use the rest to ‘buy’ a regular income for life.

If you do choose to take a lump sum you need to do this at the start.

You can usually decide how regularly you want to get your annuity income - it has to be at least annually, but you can choose. You’ll be taxed in the same way as you would be for any other income. The amount of tax you pay will depend on your individual circumstances.

With a ‘level’ annuity, the amount you get stays exactly the same, year after year. This means that if prices go up because of inflation, over time you’ll be able to afford less and less.

There are other types of annuity available where your income goes up each year or it may be linked to inflation, which can go up and down. The choices you make at the start may mean you get a lower income to begin with.

There are many different types of annuity on the market. Read our article annuity tips before you buy to find out more.

 

For example

Pension pot size at age 60:

£50,000

Take 25% tax-free cash as a lump sum

£12,500

Amount used to buy an annuity:

£37,500

To provide a guaranteed yearly income for the rest of your life of:

£1,700

Example is based on a 20% tax-rate and a Personal Allowance of £11,500 for 2017/18. No other income is taken into consideration. When added to other income for the year, the amount of tax to pay could be at a higher rate.

The figures shown are for a single life annuity, paid in arrears and are based on age 60, pension pot of £37,500 and generic rates.

The actual amount you receive and the amount of tax you may need to pay will depend on the option you choose, the rates available and your individual circumstances.

Benefits

You can get a secure income for life.

You can choose whether your income stays level or changes over time when you buy your annuity.

You might get a higher income because of certain health and/or lifestyle conditions.  So your provider might pay you more as they expect to be paying out for a shorter time.

With certain types of annuity the health and/or lifestyle conditions of your partner could also increase the amount you receive.

With some types of annuity you can nominate a loved one to receive the income after you die.

 

Considerations

Once you buy an annuity, you can't change your mind and the features you add at the start cannot be amended later.

There’s usually no lump sum to pass on when you die.

The money you get from your annuity will be taxable.

It may be years before you get back what you’ve paid in.

A few things you need to know

Let’s go shopping.
When deciding what to do with your pension pot you should be aware that different providers offer different products that may be more suited to your individual circumstances. Each product option could also have different tax implications. Their rates, investment funds, charges and terms may also be different.

For example, with an annuity they might use different criteria to assess you or your partner’s health and/or lifestyle conditions, this is often called an enhanced annuity. This might mean that you could get a higher level of income elsewhere.

This is why it’s important to shop around - so that whatever you decide to do, it’s the right decision for you.

Some money matters.
If you claim any benefits that are based on your income or savings (like housing benefit or income support), the amount you take from the plan might affect what benefits you’re entitled to and how much you get.

If you have certain debts where the creditor has a right to your income (like a bankruptcy), you might need to use the money you get to pay them off.

If you have a pension with guaranteed benefits of £30,000 or more, legislation requires you to take financial advice when looking to convert into a flexible option, such as taking the whole pension pot as cash or as flexible income.

Let’s talk about tax. You should know that tax rules can change.
If you pay too much or too little tax, it's your responsibility to check you've paid the right tax with HMRC.

If you have a defined contribution scheme (where you and/or your employer make regular contributions), taking money out of your pension pot sometimes triggers a limit on how much can be paid into it in the future. This is called the Money Purchase Annual Allowance. Our Questions & Answers guide can give you more details.

If you are unsure what might be the best option for you, speak with a financial adviser.

Take the money

You can take all of your pension as a single or series of cash lump sums. But each choice can have different implications.

Take it all at once.
Usually the first 25% of the pension pot will be tax-free, the rest will be taxed along with any other income you may have.

As a series of smaller lump sums over time.
You don’t take the whole tax-free lump sum at the start. Instead, you can take small cash lump sums while the remainder stays invested. With each withdrawal, the first 25% will normally be tax-free and the rest may be subject to income tax.

Doing this over a number of tax years could help to manage the tax you pay.

The money you get from cashing in your pension or taking small lump sums, will count towards your taxable income for the year, along with any salary, benefits, State Pension or anything else you could pay income tax on.

The amount of tax you pay will depend on your individual circumstances.

Whichever way you take your money, particularly if it’s your main source of income, you’ll need to plan it out carefully so you don’t run out of money and need to rely on other kinds of income.


For example

Take it as cash: One lump sum

Pension pot size at age 60:

£50,000

Take 25% tax-free cash:

£12,500

Take 75% that is subject to tax:

£37,500

Estimated tax payable:

£5,200

Total received by you:

£44,800

 

Take it as cash: In stages

Pension pot size at age 60:

£50,000

To provide an annual cash lump sum of:

£2,400

Amount of each cash lump sum that is tax-free:

£600

Amount of each cash lump sum that is subject to tax:

£1,800

Estimated tax payable:

£0

So your pension pot could last for:

32 years & 7 months

Example is based on a 20% tax-rate and a Personal Allowance of £11,500 for 2017/18. No other income is taken into consideration. When added to other income for the year, the amount of tax to pay could be at a higher rate.

The investment growth on the amount left invested is calculated at 3% per year. It does not include charges which may apply.

This is not an indication of what you may get in the future and is not guaranteed.

The actual amount you receive and the amount of tax you may need to pay will depend on the option you choose and your individual circumstances.

Benefits

You can take the money in one lump sum.

Alternatively, you can take smaller lump sums, as and when you like, with the remainder staying invested in your pension.

If you take your cash in stages you can decide where to invest what’s left.

It is potentially tax efficient if you take it in stages.

You can leave whatever’s left to your family when you die.

 

Considerations

Depending on your tax situation, any money you take over your tax-free cash could still push you into a higher tax-bracket.

If you take out too much money, you may run out and have to rely on other income.

If you take your pension pot in smaller chunks what’s left remains invested, meaning the value could go down as well as up. So you may not get back what you’ve put in.

You will still have to pay charges on the money left invested.

You may lose any existing guarantees you have on your pension.

A few things you need to know

Let’s go shopping.
When deciding what to do with your pension pot you should be aware that different providers offer different products that may be more suited to your individual circumstances. Each product option could also have different tax implications. Their rates, investment funds, charges and terms may also be different.

For example, with an annuity they might use different criteria to assess you or your partner’s health and/or lifestyle conditions, this is often called an enhanced annuity. This might mean that you could get a higher level of income elsewhere.

This is why it’s important to shop around - so that whatever you decide to do, it’s the right decision for you.

Some money matters.
If you claim any benefits that are based on your income or savings, like housing benefit or income support, you might lose some or all of those by taking a big lump sum or if it is considered you have spent it unwisely.

You may also have certain debts where the creditor has a right to any cash you take (e.g. bankruptcy), so you might need to use the money you get to pay them off. You should speak to the relevant agency before making any decision.

If you have a pension with guaranteed benefits of £30,000 or more, legislation requires you to take financial advice when looking to convert into a flexible option, such as taking the whole pension pot as cash or as flexible income.

Let’s talk about tax. You should know that tax rules can change.
If your pension provider doesn’t hold your tax code, then the first payment you take could be subject to Emergency Tax. If you've already made plans with the money, Emergency Tax could reduce this and you may initially end up with less than you thought you would get. If you pay too much or too little tax, it's your responsibility to check you've paid the right tax with HMRC.  Our Emergency Tax calculator can show you just how much Emergency Tax you could end up paying.

If you have a defined contribution scheme (where you and/or your employer make regular contributions), taking money out of your pension pot sometimes triggers a limit on how much can be paid into it in the future. This is called the Money Purchase Annual Allowance. Our Questions & Answers guide can give you more details.

If you are unsure what might be the best option for you, speak with a financial adviser.

Mix and match

You can combine the options available to you.

You can take a 25% tax-free cash lump sum. And then choose to buy an annuity (guaranteed income) with part of your pension pot, while the remainder could go into drawdown, to provide flexible cash or income as and when you need.

And if you've got more than one pension, you can choose different options for each one or do these in stages.

Before combining any options, take time to think about the benefits and considerations of each option on its own.

For example

Pension pot size at age 60:

£50,000

Use £20,000 to buy an annuity (of which the following you can take 25% tax-free at the start):

£5,000

With the remaining £15,000 to provide a guaranteed yearly income for the rest of your life:

£700

Use another £20,000 to put into drawdown (of which the following you can take 25% tax-free at the start):

£5,000

And then take the same amount each year:

£1,200

Which could last you:

15 years & 6 months

Leave some in your pension pot for later:

£10,000

Example is based on a 20% tax-rate and a Personal Allowance of £11,500 for 2017/18. No other income is taken into consideration. When added to other income for the year, the amount of tax to pay could be at a higher rate.

The investment growth on the amount left invested is calculated at 3% per year. It does not include charges which may apply.

This is not an indication of what you may get in the future and is not guaranteed.

The actual amount you receive and the amount of tax you may need to pay will depend on the option you choose and your individual circumstances.

Benefits

You can use your pension pot to provide you with different options. Say, some as cash, some as an income.

As part of that income, you can either buy an annuity, a drawdown or choose a combination of the two.

However you combine options, you’ll normally be able to take 25% of your pension pot tax-free.

You don’t need to restrict yourself to one provider.

 

Considerations

The value of any money left invested can go down as well as up. So you may not get back what you've put in.

Not all providers offer all options and/or the ability to combine them.

By combining options you may increase the number of charges you have to pay.

There may also be penalties so be sure to check.

A few things you need to know

Let’s go shopping.
When deciding what to do with your pension pot you should be aware that different providers offer different products that may be more suited to your individual circumstances. Each product option could also have different tax implications. Their rates, investment funds, charges and terms may also be different.

For example, with an annuity they might use different criteria to assess you or your partner’s health and/or lifestyle conditions, this is often called an enhanced annuity. This might mean that you could get a higher level of income elsewhere.

This is why it’s important to shop around - so that whatever you decide to do, it’s the right decision for you.

Some money matters.
If you claim any benefits that are based on your income or savings, like housing benefit or income support, you might lose some or all of those by taking a big lump sum or if it is considered you have spent it unwisely.

You may also have certain debts where the creditor has a right to any cash you take (e.g. bankruptcy), so you might need to use the money you get to pay them off. You should speak to the relevant agency before making any decision.

If you have a pension with guaranteed benefits of £30,000 or more, legislation requires you to take financial advice when looking to convert into a flexible option, such as taking the whole pension pot as cash or as flexible income.

Let’s talk about tax. You should know that tax rules can change.
If your pension provider doesn’t hold your tax code, then the first payment you take could be subject to Emergency Tax. If you've already made plans with the money, Emergency Tax could reduce this and you may initially end up with less than you thought you would get. If you pay too much or too little tax, it's your responsibility to check you've paid the right tax with HMRC.  Our Emergency Tax calculator can show you just how much Emergency Tax you could end up paying.

If you have a defined contribution scheme (where you and/or your employer make regular contributions), taking money out of your pension pot sometimes triggers a limit on how much can be paid into it in the future. This is called the Money Purchase Annual Allowance. Our Questions & Answers guide can give you more details.

If you are unsure what might be the best option for you, speak with a financial adviser.

Sit tight

You don’t have to do anything with your pension pot when you reach age 55. If you don’t need the money just yet, you could leave it invested where it is for now.

You may have decided that you want to carry on working for longer. Your pension pot could grow, meaning more money for the years of retirement when you do eventually decide to retire. However, as it’s invested, the value could go down as well as up during this time. 

You won’t usually pay tax on your pension whilst it is still invested and, until age 75, you will still receive tax relief on contributions you make up to a certain amount.

Check everything thoroughly with your provider before choosing to delay taking your pension, as there may be rules specific to your plan or pension scheme that limit the options you have.

For example

Pension pot size at age 60:

£50,000

If you leave it where it is until age 65, your pension pot could be about:

£58,000

If you leave it where it is until age 70, your pension pot could be about:

£67,400

Example is based on a 20% tax-rate and a Personal Allowance of £11,500 for 2017/18. No other income is taken into consideration. When added to other income for the year, the amount of tax to pay could be at a higher rate.

The investment growth on the amount left invested is calculated at 3% per year. It does not include charges which may apply.

This is not an indication of what you may get in the future and is not guaranteed.

The actual amount you receive and the amount of tax you may need to pay will depend on the option you choose and your individual circumstances.

Benefits

As long as your money stays in your pension pot you won’t usually pay tax on it.

If you are still making payments to your pension pot you might have more to retire on when the time comes. This might mean a larger amount to last for a shorter time.

Until age 75, you’ll normally get tax-relief on contributions you make into your plan.

 

Considerations

While it remains invested the value can go down as well as up, so you may not get back what you’ve put in.

Your provider may apply an upper age limit on when you can take your money as cash or turn it into an income.

There’s no guarantee you’ll get more, or the same level of cash and/or income from your pension pot if you take it at a later date.

Charges for managing the fund will continue to be applied whilst your money remains invested.

You may lose any guarantees and/or restrictions may apply if you delay taking your pension beyond the original retirement date.

A few things you need to know

Let’s go shopping.
When deciding what to do with your pension pot you should be aware that different providers offer different products that may be more suited to your individual circumstances. Each product option could also have different tax implications. Their rates, investment funds, charges and terms may also be different.

For example, with an annuity they might use different criteria to assess you or your partner’s health and/or lifestyle conditions, this is often called an enhanced annuity. This might mean that you could get a higher level of income elsewhere.

This is why it’s important to shop around - so that whatever you decide to do, it’s the right decision for you.

Some money matters.
If you claim any benefits that are based on your income or savings, like housing benefit or income support, you might lose some or all of those by taking a big lump sum or if it is considered you have spent it unwisely.

You may also have certain debts where the creditor has a right to any cash you take (e.g. bankruptcy), so you might need to use the money you get to pay them off. You should speak to the relevant agency before making any decision.

If you have a pension with guaranteed benefits of £30,000 or more, legislation requires you to take financial advice when looking to convert into a flexible option, such as taking the whole pension pot as cash or as flexible income.

Let’s talk about tax. You should know that tax rules can change.
If your pension provider doesn’t hold your tax code, then the first payment you take could be subject to Emergency Tax. If you've already made plans with the money, Emergency Tax could reduce this and you may initially end up with less than you thought you would get. If you pay too much or too little tax, it's your responsibility to check you've paid the right tax with HMRC.  Our Emergency Tax calculator can show you just how much Emergency Tax you could end up paying.

If you have a defined contribution scheme (where you and/or your employer make regular contributions), taking money out of your pension pot sometimes triggers a limit on how much can be paid into it in the future. This is called the Money Purchase Annual Allowance. Our Questions & Answers guide can give you more details.

If you are unsure what might be the best option for you, speak with a financial adviser.

Where can I learn more?

Call us on 0800 000 000 9am-5pm, Monday to Friday

Our dedicated teams are here to help answer questions you might have when you are ready to retire.


 

We recommend you use Pension Wise, a free impartial guidance service from the government to help you understand your options at retirement.

Visit pensionwise.gov.uk or call 0300 330 1001 to book a phone or face-to-face appointment.

Visit the www.hmrc.gov.uk to get information on tax rules and legislation which may affect you of you have a pension plan or looking to access your options.