What can I do with my pension?

When you reach 55, there are several options for what you do with the money in your pension pot. You can take up to 25% as a tax-free sum, you can leave the money invested and withdraw cash when you need it (‘income drawdown’) or you can buy an annuity to get a guaranteed income.

If you have a defined contribution pension, when you reach retirement age (currently 55) you have several options for what you do with your pension. Recent pension reforms have relaxed the rules, so buying an annuity is no longer your only option.

Withdrawing a lump sum

When you reach the age of 55 you can now withdraw up to 25% of your pension as a lump sum, and you won’t have to pay any tax on this withdrawal. If you don’t choose to do this, you can instead draw separate smaller amounts from your pension and get 25% of each withdrawal tax-free.

Income drawdown

Leaving your pension invested but taking money as and when you need it is called income drawdown. Remember that you’ll need to pay tax on these withdrawals once you’ve taken more than 25% of your pot.

There are benefits and disadvantages to income drawdown. On the positive side, income drawdown can be a flexible way of taking money from your pension, and because your money stays invested, it can benefit from investment growth. But on the other hand, your pension money can lose value if investment returns are poor, and if you take out too much money or live longer than you expect, your pension fund may run dry while you’re still alive.

Buying an annuity

The other, more traditional option, is to use your pension funds to buy a pension annuity. This is a financial product that pays you a guaranteed income for an agreed period, which is often the rest of your life. Obviously the major advantage of an annuity is that you know you’ll have some money coming in each year, but on the other hand annuity rates can be poor, so you may receive quite a paltry annual amount from your pension.

Think carefully about what to do with your pension

Remember that it’s possible to choose more than one of these options. For example you can take a lump sum from your pension, begin income drawdown, and then at some stage use the rest of your pension pot to buy an annuity.

When you’re deciding what to do with your pension, it’s important to take the tax implications into account, and also to think about what will happen to your pension if you die, as this differs depending on the option(s) you’ve chosen.

When you’re nearing retirement age, it’s sensible to start considering what to do with your pension. Once you’re 50 or over you can get a free Pension Wise appointment, with a specialist who will run through your options. You may also choose to seek further advice.

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Last edited: 05-12-2016

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