Pension options at 55 or over: what to know before taking an income

We’re living through challenging times. Stock market volatility affects the value of investments, and you may have seen a fall in the value of your pension.  

The impact of this is that, if you are planning to retire or withdraw money from your pension soon, you may have to take a lower level of income or a smaller cash lump sum than you had originally expected. Alternatively, it may mean that you should consider deferring some plans altogether, thereby enabling more pension contributions and the underlying value of your pensions to benefit from any recovery in stock market values.

With this in mind, remember that your pension fund is designed to support you throughout your retirement. It’s important to avoid making hasty decisions about the money that’s taken a lifetime to build up - acts of haste today could be repented at leisure tomorrow. 

From age 55 (57 from 6 April 2028 unless you have a protected pension age), you can use some, or all, of your defined contribution pension fund to buy an annuity, take cash, take a flexible income, or use a combination of all three. Your choices will depend on your pension type and what your pension provider offers. You can usually take 25% of your pension tax free. Anything you take above this using the options below will be taxed as income. Taking tax-free cash will reduce the amount available to provide an income from these options. Pension tax benefits are based on personal circumstances and are subject to change.

Buy an annuity

A guaranteed income for life.

• With most annuities your income is guaranteed, but you can’t change an annuity once it’s set up, even if your circumstances change.
• You could get a higher level of income if certain health conditions or lifestyle factors apply.
• You can choose to carry on providing income for a partner or dependant after you die, but this option must be selected upfront.

Take your money as lump sum payments

Take cash as and when you like.

• For each lump, 25% will be tax-free and 75% will be subject to tax based on your personal circumstances.
• You can withdraw all your pension pot if you wish to, but you may need to rely on other income or funds to provide for your retirement.
• Any money you haven’t taken stays invested and the value could go down as well as up.
• If there’s any money left when you die it can go to your family. To find out more about how your defined contribution pension will be taxed after you die visit gov.uk/tax-on-pension-death-benefits

Income drawdown

Take income as and when you need it.

• This allows you to vary what you take according to your needs. Your fund could run out, so it's important to regularly review how much you're taking.
• Money you haven’t yet taken stays invested in your pension pot, and the value could go down as well as up.
• If there’s any money left when you die it can go to your family. To find out more about how your defined contribution pension will be taxed after you die visit gov.uk/tax-on-pension-death-benefits

Use a combination of all three

Combine an annuity, cash and income drawdown, either together or at different times.

• Choosing a combination of an annuity, cash and income drawdown means you can access the benefits and accept the risks of all options.
• The annuity gives you a guaranteed income, so you always know how much you have coming in. Taking cash or income drawdown is more flexible and lets you increase or decrease the amounts you take out as and when you need to – you could take out all your pension pot if you wish.

Using your pension money will leave less money in your pension pot, and will have an impact on:

• The money you’ll have in retirement. Anything you use now will mean less, or even nothing at all, is left in your pension.
• The value of your investments. If you choose to only withdraw some of your money, what’s left will remain invested, and could go down as well as up in value.
• The access you have to your money. Once you buy an annuity you can’t generally change it or cash it in, even if your personal circumstances change.
• The tax you’ll pay. The amount you take above 25% will usually be taxed as income. Taking a taxable lump sum could mean paying higher or additional rate tax.
• It may affect certain benefits. Taking an income from your pension could have a tax impact and affect whether you're eligible for some welfare benefits.
• The inheritance you can pass on. This depends on what you decide to do with your pension money.

The amount of income that you could get for your retirement can vary considerably from one provider to the next, so it’s a good idea to ‘shop around’ and see what different providers can offer you before making any decisions.

We’re bursting with options to help you plan your retirement, so you can choose what support is right for you. We’re here to help every step of the way with everything from online resources, to tailored financial and pension advice.

Pension Wise from MoneyHelper is a free, impartial, government-backed service. If you're 50 or over and you want to understand your retirement options, make it your first port of call.

If you're 50 or over and you want to understand your retirement options, visit the MoneyHelper website or call 0800 138 3944 for details.