Pension Income Options
When you retire, you can usually take part of your pension fund as a tax-free lump sum. The remainder of your fund must be used to provide you with an income.
If you have a money purchase pension, you can do this in various ways, for example using annuities or unsecured pension options. We explain briefly how they work and the things you need to consider before deciding which to choose.
If you're getting a pension from an occupational salary-related (defined benefit) pension scheme, your income in retirement is provided by your employer's pension scheme direct. So you don't need to make any of the retirement choices mentioned here. Talk to your pension scheme administrators for more information.
If you have a money purchase pension scheme (occupational defined contribution, a personal or stakeholder pension), this section is for you.
Retirement
Retirement means when you start to take benefits from your pension. You can usually do this from age 50, but the minimum age from which you can take your benefits is going up from 50 to 55 by 2010. The precise timing may vary between pension schemes, so check with your pension provider.
Flexible retirement
Since April 2006 retirement has become much more flexible than in the past. You have more options; for example, you can:
- delay buying an annuity;
- receive an income but continue to work, if your scheme rules let you; or
- work beyond normal retirement age if your scheme rules let you.
Types of retirement options
After taking any lump sum, there are a number of ways to take an income from your money purchase pension. Some, such as an unsecured pension or phased retirement, may only be suitable if you have a large pension fund or other substantial assets and you are prepared to take some risks with your pension fund to get greater flexibility and a higher return.
Your options include:
- a lifetime annuity;
- an unsecured pension; and
- phased retirement.
What if my pension funds are small?
If the total of all your pension funds is less than a minimum amount, you can take some or all of your pensions as a cash lump sum, rather than taking an income. This is known as trivial commutation.
You must be between at least 60 but not yet reached 75 and all the pension funds which you want to ‘commute’ must be converted to cash within a 12-month period.
A quarter of the money you will get is tax free and the rest will be taxed as income.
You don’t have to ‘commute’ all your pension funds, but bear in mind that it might be difficult to get a retirement income from small funds because many annuity providers will not take funds below a specified minimum, say £10,000.
More than one pension fund?
If you are using more than one pension fund to buy an annuity, think about combining them when you are shopping around. You may get a better annuity rate from a larger fund. If you have small funds, combining them may also enable you to achieve total funds above the minimum specified by providers.
