Retirement income options explained
Deciding how to access your pension pot
This tool will help you understand the main ways to access the money you've saved in your pension pot.
Accessing your pension
You can access your pension pot from age 55.
Most people wait until they stop work.
But you don't have to take the money then. You can leave it invested if you have other income – perhaps because you are looking for a more flexible retirement and will still be working part time (so only want a small income from your pension).
Here's our guide to how the process works.
Your tax-free lump sum
When you access your pension pot, you can normally take up to 25% as a tax-free lump sum.
The rest can be turned into a regular income to live off – this is taxable.
There are two ways to do this:
- An annuity
- Income drawdown
Option 1: An annuity
How annuities work
Rather than hope that the money lasts for as long as you live, you can use the rest of your pension pot to buy an income.
This is called an annuity. You then get a taxable income for the rest of your life.
When you die the income usually stops, although you can choose for it to carry on – to a spouse, for example.
Option 1: An annuity
How much you get
You're paid an annuity for as long as you live so the amount you get depends not only on the size of your pension pot – but also on other factors, such as your age. There are also different types of annuity such as:
- Level: You're paid the same amount every year.
- Inflation linked: Your income will rise or stay fixed in line with inflation.
- Joint life: Your partner will be paid an income after you die. The more you choose to be paid out after your death, the smaller the income you receive whilst you are alive.
Option 2: Income drawdown
How it works
Some pensions, such as a SIPP, let you keep your pension pot invested (so that it still has the chance to grow) but take money out to live on.
How long the pension pot lasts depends on how much you take out – and how your investments perform.
If you have a secure income of at least £20,000 a year, you may be able to take flexible drawdown. Only certain sources of income count towards this Minimum Income Requirement.
Contact a Standard Life adviser to learn more.
Option 2: Income drawdown
How much you can take
To reduce the risk of you running out of money, there's a limit on how much you can take out via income drawdown, based on the equivalent annuity you could get. This limit is reviewed at least every three years.
Unlike an annuity, any money left in your pension pot when you die can be passed on to your dependants. They can leave it invested and withdraw income when they need it (which is more flexible and can keep tax bills down), take it as one lump sum (it's then taxed at 55% and no further inheritance tax is due) or buy their own annuity.
To sum up...
- You can access your pension from age 55. Most people wait until they stop work but you can take it earlier or later than that.
- You're allowed to take 25% of your pension pot as a tax-free lump sum. You can take this in stages – you don't have to take it in one go.
- The usual way to take an income is to use the rest to buy an annuity. This pays a guaranteed (taxable) income, based on your life expectancy, until you die.
- There are different types of annuity – such as level, inflation-linked and joint.
- With a larger pension pot, you could consider income drawdown. You leave the money invested and withdraw (taxable) lump sums to use as an income.
- The income from income drawdown isn't guaranteed. But any money left remaining when you die can be left to your dependants (after tax) or charity.
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To help decide the right option for you, use our guide to choosing between an annuity and income drawdown.
Taking more from your pension pot
The amount most people can take out of their pension each year through income drawdown is 100% of a comparable annuity. The actual figure is determined by the Government, based on factors such as your age.
If you're over 55 and expect to have a retirement income of at least £20,000 there is no limit on how much you can draw down, however you would have to pay tax on the income you receive.
The types of income that count towards this minimum income requirement (MIR) include the basic state pension, additional state pension, annuities and employer's pensions.
Important information
The value of investments, and any income from them, can fall as well as rise and you could get back less than you invest. References to legislation and taxation are based on current rules. Legislation and taxation may change in the future. All figures relate to the 2011-12 tax year, unless otherwise stated.
