Accessing your pension pot: Which options are available?
Your best retirement option depends on a variety of things, including your:
- When you retire
- Your dependents
- Your objectives
- The size of your pension and savings.
Once you know these things, it'll be easier for you to decide which of the following retirement options is right for you.
Annuities - guaranteed income for life
Annuities enable you to exchange your pension pot for a guaranteed income for life, and were once the most common retirement income option.
You can normally withdraw up to a quarter of your pot as a one-off tax-free lump sum, then convert the rest into a taxable income for life – an annuity. They also let you provide an income for life for a dependent or beneficiary after you die.
Flexible retirement income - pension drawdown
Flexibility is an attractive retirement income option offered by income drawdown plans, giving you access to your money while leaving it invested, so your funds keep growing.
This retirement option normally means you take up to 25% of your pot, then re-invest the rest into funds that will give you a regular taxable income. You need to manage your investments carefully because, unlike annuities, your income isn’t guaranteed for life.
Small cash withdrawals - tax free
When you turn 55, one retirement option to consider is how much you can afford to leave invested. Do you really need all the money now? There could be charges for each cash withdrawal and/or limits on how many withdrawals you can make each year. So, if you can, it may make more sense with this retirement option to leave your pension pot to grow so you can enjoy a larger tax-free amount in years to come.
Combination - mix and match
The best retirement option for you might be to combine everything above. You might want to use some of your savings to buy an annuity to cover the essentials (rent, mortgage or household bills), with the rest placed in an income drawdown scheme that allows you to decide how much you can afford to withdraw and when. Or you might want to use a lump sum now and purchase an annuity later as your circumstances change.
Which retirement option or combination is right for you?
There are many things to consider when deciding what the best retirement option for you is. Once you answer the questions below, deciding should be much easier.
- How much income will my withdrawals give me?
- How much money can I safely withdraw?
- How do I invest to provide the income I need?
- How can I make sure I don’t end up with a large tax bill?
Five things to consider before withdrawing money from your pension
1. Pensions freedoms
Familiarise yourself with the pension freedoms so you are aware of your retirement options. You can now do a lot more with your pension pot than previously.
2. Saving requirements
Consider the amount of retirement income you will need each month to maintain your lifestyle. Ask yourself:
- How much might I need?
- How much might I get?
- Do I still have a mortgage to pay off?
3. Costs later in retirement
Investment funds or investment trusts are where you invest in hundreds, sometimes thousands, of businesses at the same time. These can be passively or actively managed, depending on how much you want to pay. Actively managed tends to cost more because a fund manager will pick your ethical investments for you.
4. Health and life expectancy
We tend to live much longer nowadays, so your retirement income options should last for the rest of your life. If you have a partner, do you need to provide for them financially after you die, or are you relying on them?
5. Professional advice
A growing number of us are dipping into our pension before retirement age. To make sure you're making the best retirement income decisions, it's a good idea to get professional advice.
Will I make money by investing ethically?
Potentially. Like all investments, however, the value of assets can change. That’s why it’s always recommended to have a diversified portfolio, so that your investments can better withstand the ups and downs of the market. If you’re the kind of person who needs guaranteed returns, a savings account might be a better option.
However, the appetite for more methods on how to invest and do business ethically and sustainably is strong. Many believe companies that demonstrate their ethical commitments do materially better, and it’s worth remembering there are many ethical companies that have decades of growth under their belts.