Accessing your Pension
There are three main types of pensions:
- 2 months before you reach your State Pension age you will receive a letter telling you how to begin claiming your State Pension.
Defined Benefit Pension
- Your Pension Provider will have details on the process of claiming your pension
Defined Contribution Pension
- Once you reach 55 you have complete freedom over what to do with your pension pot. Contact your pension provider for details on your options.
What You Can Do With Your Pension
When you reach age 55 you will be able to start taking some retirement benefits. In other words, you will have access to the money that you have built up in your workplace pension, but not your State Pension yet. In essence, you can take as little or as much as you want from your workplace pension and there are a number of ways of doing this, outlined below.
Enter drawdown, which allows you to take a variable amount of money from your pension whilst leaving the rest of the fund invested.
- Pension drawdown is a complex product in which you invest into multiple funds with differing volatilities and from which you can withdraw an income. The income you receive may be adjusted periodically depending on the performance of your investments. You may need help from a regulated financial adviser to oversee your withdrawals and funds performance.
Purchase an annuity to provide a guaranteed income for the rest of your life.
- Annuity is a retirement income product which you buy with some or all of your pension pot. It will then pay you an income either for life or for a set period. Once entered into, you cannot change from your annuity package.
Take cash as one or a number of lump sums called Uncrystallised funds pension lump sums.
- This involves taking your tax-free cash allowance gradually, from a series of withdrawals on which 75% is subject to tax each time.
Take your entire pot in one go.
- Be aware that if you do this you may end up with a large tax bill and possibly run out of money in retirement. This option won’t include an income for life, and once you exercise this option you can’t change your mind. It is often more tax-efficient to consider an alternative method of taking your pension.
Opt for a combination of the above options.
- You can choose to take 25% of your pension pot tax free, and invest a portion into a small annuity, and invest the rest into a drawdown if you desire. Seek financial advice before committing.
Or, alternatively, you could choose to leave your money invested and continue to build up your pension fund until a later date.
- If you defer your retirement and do not draw from your pension fund immediately, it will begin to accrue further growth. This gives you the greatest flexibility as it leaves all your options open.
You may be able to take benefits from your pension earlier than age 55, if you have what is known as a protected pension age from a pension scheme and therefore qualify for early retirement under prior legislation. You might also be able to take early retirement benefits if you are forced into retirement from ill health.
You do not need to stop working when you start to take pension benefits and you can also phase your retirement over a number of years.
Which Should You Pick?
Which is best for you depends on a number of factors, including –
- Your circumstances
- When you plant to retire
- Attitude to risk
- Other sources of income
- Whether you have any dependants
It is a complex and important decision, so we strongly recommend that you seek financial advice from a qualified financial advisor.
Pension Wise is part of Money Helper, the government’s free and impartial guidance service which offers people approaching retirement free, impartial guidance about their choices. You can receive Pension Wise guidance online, over the phone, or face to face. Pension Wise provides tailored guidance to explain what options you have and helps you think about how to make the best use of your pension fund and offers information about tax implications.
Beware of Investment Scams.
If you are interested in taking your whole pension as one lump sum, be certain that you are speaking with trustworthy sources.
Fraudsters often target people who have taken money out of their pension and there has since been a sharp rise in pension related scams.