Pension withdrawal methods

There are many different ways you can access your pension benefits, but not every pension policy will offer the same options.

The best method will depend entirely on your personal circumstances, tax position and what goals you want to achieve in retirement.

What is an annuity?

 Annuities enable you to exchange your pension pot for a guaranteed income for life. They were once the most common pension option to fund retirement. But changes to the pension freedom rules have given savers increased flexibility.

If you purchase an annuity this will provide a guaranteed income for the rest of your life. With this option, the provider agrees to pay you an agreed regular sum until you die. With an annuity, you may receive more or less money than you put in depending on how long you live after your annuity has started.

What is flexi-access drawdown?

When it comes to assessing your pension options, flexibility is the main attraction offered by flexi-access drawdown, which enables you to access your money while leaving it invested, meaning your funds can continue to grow.

Flexi-access drawdown normally allows you to draw 25% of your pension fund as a tax-free lump-sum, or series of smaller sums. Your pension pot will last until you have taken all your money out. The level of income you take and any investment growth will be key factors as to how long your pension pot will last.

Can I take some or all of my pension pot in cash?

When you reach the age of 55, you are permitted to withdraw all or some of your pension pot as either one lump sum, or if you want in smaller amounts. Although 25% of the amount you take is tax-free, you will pay income tax on the rest which could lead to a significant tax bill, and the risk of you running out of money in retirement.

Once you receive your money after tax, you are completely responsible for it and can use it as you require. Money you receive from your pension is looked at when working out your entitlement to any state benefits. Taking a large lump sum in one go could affect the benefits you can receive.

Can I take a combination and mix and match proceeds from my pension pot?

It may suit you better to use a combination of the options outlined above. You might want to use some of your savings to purchase an annuity to cover the essentials, for example, rent, mortgage or household bills, with the rest placed in flexi-access drawdown that allows you to decide how much you wish, and can afford, to withdraw and when.

Alternatively, you might want more flexibility in the early years of retirement, and more security in the later years. If that is the case, this may be a good reason to delay purchasing an annuity until later

Do I have the option to leave all my pension pot for now and defer my pension?

You could decide not to take your pension at your selected retirement date and leave it invested until you are ready to take your benefits. This means your pension pot has the potential to grow, although this is not guaranteed. It is important to ensure you do not lose any guarantees which only apply at your retirement date if you decide to leave your pension pot.