Think about how you will take benefits from your pension
When you get closer to your retirement date, there are several different ways you can take benefits from your pension.You'll need to decide which ones are most appropiate for you. Here are the choices.
1. You'll have the option to take up to 25% of your pension pot as a tax-free lump sum. Remember benefits taken from your pension fund as an income, instead of a lump sum, are usually taxable. But by taking the tax-free cash out of your pension pot, you'll reduce the amount which remains to provide a regular income. That said, your pension normally dies with you, so by taking the full tax-free cash you can guarantee that at least a quarter of it is in your hands, and won't be lost to your pension company should the worst happen to you early in your retirement.
Whether it's actually better value to take the tax-free cash or not actually depends on how long you survive. Find out more by reading Make the most of your pension pot.
2. After you've decided whether to tax-free cash or not you'll then need to decide what to do with the rest of your pension pot. Most people choose to buy an annuity which converts the pot into a regular guaranteed income.
Annuities can be adapted to provide an income which is fixed, increases in line with inflation or increases by a fixed percentage each year. If you choose an annuity which rises in value over time, then expect the initial amount of income to be lower than that provided by a fixed annuity which pays the same amount year in, year out.
You can also add a host of other features including:
- Spouses benefits - you can arrange for your annuity income to be paid to your spouse/partner after your death.
- A guarantee period - without a guarantee period, your annuity will only lat as long as you do. If you only live for one year after buying your annuity, the rest of your pension fund - which hasn't yet been paid out to you - will be completely lost to your heirs and retained by your annuity provider. But, by buying an annuity with a guarantee period you can ensure your income is paid out for a least, say, 10 years, and more if your survive longer. So if, for example,you have an annuity which is guaranteed to last for 10 years but you die after three, your income will continue to be paid to your spouse/dependant for the remaining seven years.
- An enhanced or impaired life annuity - These are special types of annuity which allows you to receive a higher income if you have a lower than average life expectancy. If, for example, you're a smoker or you suffer from high bold pressure you could be eligible for a better annuity. Or, if you have a serious medical condition you may qualify for an even more generous income.
Read How to buy the right annuity for the full lowdown on all these features and the impact they could have on your income.
3. But you don't have to buy an annuity. If you prefer you can drawn an income from your pension fund while it remains invested on the stock market (or in other assets). This is known as unsecured pension. The main advantage is that there is the potential for your pension to carry on growing value giving you a higher income in retirement. But, on the downside, your pension could fall in value if the assets it's still invested in don't perform well.
Read Draw a bigger income from your pension to learn more.