Retirement can be a time when you can finally relax and enjoy some of the things you’ve never had time to do. But it certainly helps if you make the right choices about setting up your retirement income.
Increasingly, UK retirees have access to savings in one or more of their defined contribution (money purchase) personal or workplace schemes – but what are the ways in which you can turn these savings into income?
If you have saved into a defined contribution (DC) scheme, the good news is that you have considerable flexibility about how to access your money. Thanks to the ‘pension freedoms’ that came into effect in 2015, you have more options than ever before.
We’ve put together this introductory guide to your options for retirement income from defined contribution pension savings. Note: if you are a member of a defined benefit (DB) scheme, you may wish to contact your scheme for information on your options as these will differ from scheme-to-scheme.
Taking a Cash-Free Lump Sum
As soon as you are able to access your DC pension savings at age 55, you will typically be able to take up to 25% as a one-off tax-free lump sum.
Leaving Your Savings Where They Are
Whether you take your tax-free lump sum or not, you do have the option of leaving your pension savings where they are. You can then either leave the money invested or take lump sums as and when you wish. Bear in mind that if you take an initial tax-free lump sum, 100% of additional withdrawals will be taxable. If you don’t take an initial tax-free lump sum, 75% of each withdrawal will be taxable.
Flexibility With Drawdown
Flexi-access drawdown is a retirement option that allows you to take income from your pension while keeping your fund invested with a specialist drawdown provider. With flexibility in mind, you can choose how much to withdraw and when, providing control over your finances during retirement. It gives you the freedom to adapt your withdrawals based on your changing financial needs. However, you will run the risk of poor investment performance affecting the size of your pension savings.
Guaranteed Income From An Annuity
An annuity gives you guaranteed income during retirement. By exchanging your pension savings for an annuity, you secure regular payments for a predetermined period or for the rest of your life. Although annuities lack the flexibility of drawdown, you do have various options. For example, you can choose either a level or inflation-linked income and add death benefits for loved ones as a feature of your annuity.
Blend Multiple Options For a Customised Income
You don’t have to choose just one option when it comes to DC pension savings. Why not consider a blended approach instead? For example, you can buy an annuity with some of your savings and use the rest to invest into flexi-access drawdown.
Things To Consider
This article has deliberately kept things simple – but retirement income planning can be complex. You’ll need to think about issues such as the taxation implications of each option, your attitude to investment risk, and so on. Remember also that your retirement income is likely to come from additional sources too, including the UK State Pension. You may also be able to access further income if you have a property, for example through equity release or downsizing.
Conclusion
This article is very much a summary of your retirement income options. To get more information and help, there is a free guidance available from the government-backed MoneyHelper service.
This is the Pension Wise service and it provides everyone over 50 who has a defined contribution pension pot the chance to talk to a pensions specialist. You may then decide to take professional pensions advice to further help you make a decision about your retirement income options.
