What you can do now
- You can keep your money invested as long as you want but still have access to your money at any time from age 55 or 57 from 2028 (with some exceptions).
- You’ll be able to purchase a Fixed Income - Annuity if you want to.
- You may prefer to pass on your pension wealth to your family. It can be an income, a lump sum or both - it’s up to you.
- You can choose to set up a regular flexible income which can keep your options open but this means you aren’t guaranteed the income will last until you die.
Remember, where your money remains invested, it’s value can go up or down and could be worth less than you paid in.
The choices you make will depend on your individual circumstances. You may need to transfer to a different product to access some of the options described here.
This table explores the different options available to you. You can even mix and match to find the right solution for you.
Compare your current retirement income options - what you can do now
Fixed Income - Annuity
Flexible Income - Drawdown
|How much income will I get, or be able to drawdown from my pension?||This will depend on your age, health and a variety of other factors, such as the size of your retirement fund.||Capped Income Drawdown - currently you can take a maximum of 150% of the value of an equivalent Guaranteed Income (Annuity). But after April 2015, you will have the choice to move to Flexible Drawdown (see below).
Flexible Drawdown - currently available with a £12,000 minimum income requirement – you decide on the level of income you want to take. After April 2015 everyone will be able to use Flexible Drawdown. There will be no restrictions on income and you can access all of your pension pot in a lump sum. (however this may lead to increased income tax – spreading payments will normally reduce the income tax paid)
|If my circumstances change, can I change my mind?||No, the decision to buy a Guaranteed Income requires careful consideration as once you make your selections and purchase; you cannot change your mind.||As the name suggests, Flexible Income gives you flexibility to stop, start, change your income needs, depending on your available funds and HMRC limits. You might even consider that the time is right to purchase a Fixed Income (annuity).|
|How much of my pension pot will be passed on to my family when I die?||None, unless you die during a Guarantee period (this is an annuity option you may be able to take and guarantees that your annuity will be paid for a minimum period – typically 5 or 10 years). There's also the option to provide a pension for your spouse or dependent. All of these options will generally result in a lower level of income.||After tax your family will receive any money remaining in your pension pot. However, depending on the circumstances, the tax charge may vary.|
|Will my pension pot continue to grow?||No||Yes, potentially. Your money is still invested giving you the opportunity of growth but remember investments can go down as well as up and if you are taking money out your investments would need to grow more than the income you are taking.|
|Is this income guaranteed for life?||Yes||No, this is the main risk. You can only take an income from your pension as long as you have a pension pot. If you end up taking your pension over a long period or take high levels of income there is a risk that you will empty your pension pot.|
|What about tax?||Up to 25% of the plan value can normally be paid tax- free with the annuity taxed as income.
The Guaranteed Income (Annuity) is treated like employment income and is subject to income tax if your total income is above the income tax threshold.
|Up to 25% of the plan value can normally be paid tax-free with any withdrawals taxed as income.
Income taken direct from the fund is also treated the same as employment income. So if you take a large percentage of your pot at once, that (along with any other taxable income you had) would be considered your taxable income for that year, potentially pushing you into a higher tax bracket. Alternatively, if withdrawals are spread over a longer period of time, this may reduce the overall income tax payable.
|Can I continue to contribute to my pension fund?||No
However, you could consider setting up a new pension plan.
|Yes, however depending on your circumstances, the level of contributions permitted will vary.|
|Is there any investment risk?||No. Your Guaranteed Income (annuity) is no longer invested. Your Income is guaranteed for life.||Yes. When using flexible income (drawdown) your pension fund remains invested and gives you flexibility and control. It's important to remember that the added flexibility comes with added risk. Poor investment performance and taking investment income will reduce your pension savings and you could run out of money in retirement. It's worth checking your investment to check that you are in the right investment funds.|
Things to think about
- Accessing your pension early could lead to higher taxes. You’re more likely to be in a higher tax band/bracket if you’re still working.
- Pensions have the opportunity to grow tax-efficiently so you should consider all of your finances carefully before taking money out of your pension.
Ask an expert
This is a big decision. If you’re unsure you should give us a call or speak to a financial adviser.