Generating your retirement income

From the age of 55 your pension fund is accessible whenever you want it, but just because it is available doesn’t mean that you should take income from it immediately. You can wait until it is in your best interests to take any income from your pension and in the meantime, your savings can remain within the tax efficient pension wrapper. You could also make additional contributions to your pension fund during this time*.

*This means that the capital value of the fund can fluctuate down as well as up, as it is subject to investment risk but continues to enjoy the favourable tax environment offered by pension schemes.

The new pension freedoms allow you to take all of your pension savings as a cash lump sum. The first 25% you take will normally be tax-free and the remainder will be added to your income and taxed at your marginal rate. Care should be taken when withdrawing money from your pension, especially large amounts, as the taxable element may take you into a higher tax bracket and you could end up with less money than you anticipated. Cashing in a pension fund may be appealing for some, but it is important to consider how you are going to fund your retirement going forward.

You can purchase a lifetime annuity from an insurance company who agrees to pay you a regular income until you die. The annuity available will depend upon various considerations such as the value of your fund, age, health, lifestyle and the type of annuity you choose. You can decide whether the payments from your annuity stay level, increase or decrease over time and whether or not you want any guarantees. If you buy an annuity you will usually have no on-going involvement with the investment of your pension fund. The purchase of an annuity could be the right choice for those who want security of income and no on-going investment risk. However, you should seek regulated financial advice when considering your retirement income options.

Income drawdown, also known as ‘flexi-access drawdown’ is available to anyone from the age of 55. The pension fund remains invested and you draw an income from the fund.* There is no minimum or maximum level of income, so you have the flexibility to decide on the level of income which suits you.

*This means that the capital value of the fund can fluctuate down as well as up, as it is subject to investment risk but continues to enjoy the favourable tax environment offered by pension schemes.

Phased retirement is a strategy based on removing some of your money out of your pension savings while leaving the rest invested. This can be done as and when required; you will receive part of the payment tax-free (usually 25%) with the balance applied to provide income. This can be either by the purchase of an annuity or income through income drawdown*.

*This means that the capital value of the fund can fluctuate down as well as up, as it is subject to investment risk but continues to enjoy the favourable tax environment offered by pension schemes.