Money Minder UK

Retirement options

When considering how you might access your personal pension plan, (often referred to as a defined contribution plan) there are many options available to you. Below is a simple breakdown of the retirement options available, however, not all of them may be available through your current provider. Before making your final decision, you will need to find out what options your current pension provider offers. As a rule of thumb, it is much better to consider all of the options available to you from the open market, not just your current penssion provider. To get a clearer picture of the pros and cons of each, you could use Money Minders online retirement planner to generate an options report that will be helpful for you to decide which option is best for you. You may also wish to use our independent financial advice services if you would like a personal recommendation.

If you have a defined benefit pension plan (commonly referred to as a final salary pension) the options below are unlikely to apply in the same way. In the first instance the way you recieve your retirement income is decided by the rules of the scheme and will often include extra benefits that you may or may not require, for example a spouses or dependents pension. For some, a secure pension income is the most important factor and simply drawing the benefits for their occupational final salary scheme at retirement will involve little more than deciding whether or not to take a cash lump sum at the start of their retirement years. For others, the normal scheme benefits may not fit in with their requirements, for example, they have no need for a spouse's pension or they have alternative pension arrangements or income in retirement that means they would prefer to access their deferred final salary scheme moreflexibly in retirement. For those individuals, where possible it might be advantageous for them to consider transferring the benefits of their defined benefit pension to a personal arrangement. However it is important for you to understand that defined benefit pension transfers is a complex area and specialist advice, from an appropiately qualified individual is required.

Utilising your pension

Your pension could represent a very large amount of your retirement savings, which alongside your savings and other pensions (for example state pension) will hopefully be enough to fund your retirement lifestyle for the rest of your life. When considering your options, you are in essence deciding which of the following options would best suit your objectves and circumstances.

As a rule of thumb, you generally have the ability to release up to 25% of your pension fund as tax-free cash from an uncrystallised pension. A pension is uncrystallised if you have not taken any tax-free cash previously from your pension pot. Once all of the tax-free cash is taken the pension is "crystallised". You can take a smaller proportion of tax-free cash, this can result in you having both crystallised and uncrystallised funds within your pension pot. Dependent upon your pension provider and subject to limits laid down by HMRC, you can continue to pay in and build up more uncrystallised pension funds if you wish.

You can use your pension fund to purchase an annuity. If you do, you are essentially spending the capital you have built up in your pension fund to provide you with a secure income, for either a fixed term or until your death. The type of annuity you purchase will determine the level of income it provides. Generally speaking it is likely to be one of the following:

Types of Annuities:

  • A Lifetime Annuity - An income guaranteed for life.
  • A Fixed Term Annuity - An income for a fixed term.
  • Enhanced / Impaired Life Annuity - An increased income if you meet criteria which is expected to decrease your life expectancy.

This option essentially allows you to 'draw-down' on your pension fund. In theory you can use the fund like a bank account as you take as much or as little from your plan as you wish. In reality, it's a lot more complex than a bank account and its important to ensure you invest the money in your pension appropiately if you are planning to utilise flexi-access drawdown. You can opt for a regular income, or take frequent or infrequent lump sums.

This gives you greater flexibility however there are important considerations:

  • Money taken from your pension utilising drawdown is classed as income and as such is subject to income tax at your marginal rate.
  • You should be aware that once the fund is gone, it is gone.
  • Your funds need to be invested so continue to be subject to investment risk.

You could withdraw the whole of your pension pot. You may be entitled to 25% tax-free cash (as mentioned above), but the remaining 75% of your fund will be treated as income and as such is subject to income tax. For many people, the tax paid at outset is considerably higher than it might otherwise be had a personal tax code been taken into account. You are likely to have to fill in an HMRC form in order to get any overpaid tax claimed back.

You don't have to choose one or the other, you could choose to use both an Annuity and Flexi-Access Drawdown. For example, if you have a pension pot of £100,000.00 you could utilise £50,000.00 (50%) of your pension pot to purchase an annuity to provide you with the fixed income you require. Then utilise the remaining £50,000.00 (50%) with Flexi Access Drawdown policy to give you the added flexibility of releasing extra income or lump sums at your leisure.

If you have no need to withdraw money from your pension in the short term, you can always leave your pension pot untouched and review your current investment strategy to ensure it is in keeping with your risk attitude and an overall investment strategy that you are comfortable with how and where your pension plan is invested. If you decide to leave your pension fund invested, you should ensure that you check the charging structure and investment strategy and then review your plan on a regular basis.

Reviewing your pension planning is important at any age, however it becomes even more important for people close to or over the age of 55 who are approaching retirement. Even if you have already retired, you should regularly review your investment and savings income to ensure that when possible, you are taking advantage of any rule or tax changes that may be of advantage. Furthermore, if your pension remains invested, it is very important to review where the money is invested regularly to ensure the investment is in line with your risk attitude.

There is no 'one size fits all'

It is important to consider all of the options available to you with respect to your personal circumstances to ensure you make the right decision for your future. Most people only get to retire once, so it is paramount that you make the right choices that works for you and your family. There are many variables which should be taken into account with regards to making the right decision - some are detailed below.

  • Personal Objectives - What do you want from retirement? What do you want to do and how do you want to utilise your pension fund?
  • Age - It is now possible to take your pension benefits from age 55. However, do you need to take your pension benefits at age 55 or would it be more suitable to wait until later?
  • Life Expectancy - How long do you expect to live considering your current health situation?
  • Health - Dependent upon your current health situation, different solutions may be more suitable. For example, if you are in bad health and suffer from a specified condition which reduces your life expectancy, you may be eligible for an enhanced annuity, which would provide you with a greater income compared to if you had no health issues.
  • Current Financial Situation - What is your current financial situation? Do you need to release funds or secure a guaranteed income?
  • Other Pension / Income Provisions - Do you have any other pensions or sources of income in retirement

Do it yourself.

It is possible to consider and choose your retirement options yourself, for information on how this can be done you should contact your existing pension provider to find out what options they can provide you with.

Obtain Financial Advice:

As choosing your retirement options is a big decision, it can be beneficial for you to obtain independent financial advice. A Financial Advisor will help you make the right choice, considering all of your circumstances and objectives.

In addition, an adviser will help identify the right: provider, plan and fund selection if applicable. This will ensure the retirement option chosen is the best solution tailored to your own personal circumstances, objectives and risk attitude.