Pension income planning

  • Understanding your pension income options
  • The options you have to choose from
  • Steps you take before you retire
  • No obligation pension income planning service
In this guide: We help you understand your retirement income options and how to plan ahead. 

Understanding your pension income 

Your pension income – the amount you need to live on in retirement – will depend on the amount you've put aside over the years, so start by working out all the sources of income you have access to. For example:

  • Occupational pensions paid by a previous employer or pension company
  • Personal pensions, e.g. a self-invested pension plan (SIPP)
  • Investments, e.g. bonds, shares or stocks and shares ISA
  • Savings, e.g. cash ISAs or deposit accounts

The total of all the above makes up your pension pot.

Currently you can start drawing your pension at the age of 55, or earlier if you have a protected low pension age or are in poor health. However, in 2028 the minimum pension age is likely to rise to 57.

When you start to plan your pension income, carefully consider all the options available to you. Each option could have a different effect on your retirement lifestyle, the tax you'll have to pay and the amount your family could inherit.

Use our simple pension income calculator to see how much you earn in retirement.

What are your income options in retirement?

What you choose to do with your pension pot can make a dramatic difference to your future comfort and lifestyle. In 2015, the government introduced extra flexibility and freedom to pension rules, giving you greater choice. So, if you're aged 55 or over (57 from 2028) and have a Defined Contribution Pension such as a Self Invested Personal Pension (SIPP), you can choose to:

  1. Leave your pension pot as it is while you continue working full or part time
  2. Buy an annuity to guarantee an income
  3. Use your pension pot to provide a ‘flexible’ income with a drawdown facility
  4. Take money from your pension as and when you need it
  5. Cash in your whole pension in one go
  6. Mix and match with a combination of these options

Your final decision is likely to depend on your financial position at retirement, any other income sources you can draw on, and your attitude to investment risk. 

 If you’re in a final salary pension scheme, you may wish to take independent financial advice before making any decisions to ensure you don’t sacrifice any valuable benefits. It is also worthwhile consulting the government's Pension Wise website to help you further understand your pension income options.

Use our simple calculator to work out your pension income.

1. Leave your pension untouched for now

You are now entitled to take money from your pension pot whenever you want. However, if you're still working full or part time, even if you've reached retirement age or received a pack from your pension provider, you might not want to take the money now. Choosing to leave your pension alone means it remains invested tax-free and may grow, providing you with more income when you eventually decide to take it.

You can stop making payments into your pension or continue paying in until your 75th birthday. These contributions will continue to benefit from pension tax relief.

2. Buy an annuity to secure a guaranteed income

You could use some or all your pension pot to buy an annuity, giving you a regular guaranteed income for the rest of your life. You can choose to take up to a 25% of your pot as a one-off tax-free lump sum and put the remaining 75% towards an annuity or use 100% to provide an annuity.

There are several types of lifetime annuity for you to compare and choose from, including an enhanced annuity, which pays a higher income if ill health means your life expectancy may be lower than average.

3. Use your pension to provide a ‘flexible’ income

If you’d like to be able to dip into your pension when it suits you, a drawdown pension may be the answer. This allows you take 25% as a tax-free cash lump sum and leave the rest invested. You can then withdraw money from the remaining balance regularly or as often as you like. The withdrawals you make will be taxed as earnings.

Reinvesting the balance in your pension means it has a chance to continue growing, although equally it could fall in value if the investments do not perform well. It also means you can pass on any remaining pension as an inheritance.

Unlike an annuity, the income you draw down from your pension is not guaranteed for life, so you will need to monitor and manage your investments carefully. Your pension pot will get smaller each time you withdraw money and may run out at some point, unless your investments manage to outperform the total amount you withdraw.

4. Take cash lump sums from your pension as and when you need it

You may choose to simply withdraw cash from your pension as and when you need it, leaving the rest untouched, to give it a chance to continue growing tax-free.

Each time you withdraw cash, the first 25% is tax-free, but the rest will be classed as taxable income. Your pension provider may also charge you for each withdrawal, or limit how many withdrawals you can make in a year.

This option will not guarantee you a regular income and you won’t be able to leave your pension to anyone as an inheritance, because the money in it has not been reinvested.

5. Cash in your pension in one go

You may cash in your whole pension in one go, but this won't give you a secure income and you might end up with a large tax bill. It is likely to be more tax efficient to choose from the other options above.

6. Mix and match

You don’t have to choose just one option. You can combine them, or switch from one to another as your needs change.

Pension income planning – countdown to retirement

If you’re not planning on retiring for some time, it's worth reviewing your pension plans now to ensure you are in the best position. Quite simply, the earlier you begin, the more pension income you could generate and the more comfortable your retirement could be.

Here are some tips on what to consider when making your final preparations over the 12 months before ‘R’ day: 

1. 12 months to retirement

  • Review all your personal finances, savings and outgoings such as the mortgage.
  • Track down all your pensions – if you’re not sure where they are, try the free Pension Tracing Service .
  • Consider what retirement income you will need.
  • Decide whether you will be fully retiring or taking part-time work.
  • Ask your pension provider(s) what the value of your pension fund is.
  • Start to shop around and compare annuities , to give you an idea of what is  available.
  • Plan what you will do with your newfound freedom.

2. 6 months to retirement

  • Your pension provider(s) will write to you and give you a valuation of your pension pot and your options, including offering you an annuity.
  • However, you are under no obligation to take out your pension from this company. You may choose to do your own research and compare all the options available to you before accepting their offer. Use our Annuity Calculator for expert guidance on your options.
  • Remember, you are entitled to take up to 25% of your pension pot as a lump sum to do whatever you wish; take a holiday, pay off debts, make home improvements. It’s entirely up to you.
  • If you would like to discuss your pension income plans, Age Partnership’s award-winning retirement planning experts are on hand to talk you though your options and find the best rates for you.

3. 3 months to retirement

  • You will probably receive another letter from your existing pension scheme provider detailing your benefits and options.
  • If you have several pensions, contact the various pension providers (if they haven’t already contacted you). You're likely to get a better pension income if you add them altogether, so get quotes based on the total amount.
  • If you are not yet receiving it, make enquiries about your State Pension.
  • You may want to contact a retirement income specialist such as Age Partnership to run through your final options. 

4. One month to retirement

  • Compare annuity rates for the final time, adding any additional options you require.
  • Use our quick and easy annuities calculator to see how much extra retirement income you could get.
  • If you want more information, the experts at Age Partnership are on hand to help – and you can then also apply for your chosen annuity through Age Partnership. 
  • Your retirement planning is now complete – have a party and enjoy the rest of your life!

Award-winning, no-obligation retirement income service 

After careful consideration, we've chosen to team up with independent and award-winning retirement specialists Age Partnership whose retirement income service is specially designed to help you make the most of your retirement. How much help you receive is up to you and there’s no obligation to go further. Choose either:

  • Non-advised service – Your retirement income specialist will give you all the information you need to make your own decisions, including answering your questions and providing illustrations of whichever income options you are interested in.
  • Advised service – If you’d prefer more assistance in reaching in a decision, an Age Partnership financial pension adviser can work with you to understand your situation and advise you on which pension income options might be best suited to you.

Pension income planning

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