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Using your Pensions

If you’ve been fortunate and/or smart enough to have put aside funds for retirement, putting these to work for your future should be an absolute priority.

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When should I start to prepare for using my pensions?

The sooner you start to prepare the better, and the more likely you are to achieve the kind of retirement you aspire to. If you’ve been fortunate and/or smart enough to have put aside funds for retirement, putting these to work for your future should be an absolute priority. As they say, fail to plan, then plan to fail!

Pension Freedoms

There have been some big changes around pension rules over recent years so it’s important that your plans have kept up to date with the various opportunities that now exist

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Here are the main options together with some pros and cons for you to be thinking about.

Flexi-access drawdown

It does what it says on the tin – you can draw your pension down in flexible ways to meet your income and capital needs. Usually this can be done from age 55 onwards, but this is going up to age 57 soon and will remain 10 years behind the normal state pension age.

Pros
  • Flexible withdrawal amounts
  • Tax efficient
  • Control over timing
  • Can take income and lump sums
Cons
  • Not guaranteed as the funds remain invested
  • Risk of depleting the funds
  • Ongoing charges

Lifetime Annuity

You could use some or all of your pension pot to purchase a lifetime annuity, which is essentially a guaranteed income for life, or a set number of years. These can be set up in various ways to meet the needs of your own circumstances, and you usually have the option to take up to 25% of the amount as a tax free lump sum.

Pros
  • Guaranteed income
  • No investment losses or costs to bear
  • No risk of the money running out
  • No need to review them
  • Can tailor them to your needs;
Cons
  • They are irreversible, so care needs to be taken to set them up correctly
  • Inflexible;
  • Income can vary so it’s important to shop around for the best deal you can get

Taking your income from a defined benefit pension scheme

Another source of guaranteed retirement income, this type of scheme is one where the amount you get is based on how many years you’ve worked for the employer and the salary that you earned. Like a lot of pension related things, there have been changes over the years, and this is definitely something to be aware of as you approach retirement.

Pros
  • No risk to you
  • income is guaranteed and likely to be inflation proofed in some way
Cons
  • Can be inflexible to some people’s circumstances

Taking your pension in cash

This may sound attractive, and could be useful in certain situations such as where a pension pot value is very small. However, there are a few risks associated with taking cash withdrawals from your pension, or taking it all and closing the plan down.

Pros
  • Can be useful for very small pots
  • Simple
  • Tax free lump sum of up to 25%
Cons
  • You can be liable to tax on cashing it in
  • lack of regular income

Do nothing

You might want to consider delaying taking your pensions, or some of them, if you don’t really need to. This could be because you will continue to work in some capacity, or have other income from savings and investments.

Use a range of options

You can of course choose to use more than one of these options as part of a robust, long-term plan to meet your goals. This could be essential to meet both your income and capital needs throughout all stages of your retirement, and to balance any requirements for guarantees versus flexibility. A combined approach is where careful planning and professional advice can pay dividends for you.

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Tools & Guides

Use our range of calculators, videos and guides to get you thinking about your retirement planning

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Tax relief calculator

Calculate the tax relief you could receive on your personal pension contributions.
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Pension Shortfall Calculator

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