What are your retirement income options?

  • Your pension pot options in 2023
  • How each pension income option works
  • Help to reach a decision
  • Calculate your pension income

In this guide: The numerous ways you can generate an income in retirement using your pension pot and where to find the right deal for you.

Your pension pot options in 2023

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 a greater choice of income options when it comes to deciding what to do with your pension pot:

  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. Mix and match with a combination of these options
  6. Cash in your whole pension in one go

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.

Use our simple calculator to work out your pension income.

How does each pension income option work?

If you’re aged 55 or over (57 from 2028) and have a Defined Contribution Pension such as a Self-Invested Personal Pensions (SIPP), you can choose from a range of retirement income options.

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.

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. 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.

6. 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.

It is also worthwhile consulting the government's Pension Wise website to help you further understand your pension income options.

Which of these options will work best for you is a big decision and one that will very much depend on your personal circumstances. For example, you may want to buy an annuity to guarantee a proportion of your retirement income while keeping some of your pension pot invested so you can draw on when you want it. That’s why it is worth getting some guidance from a pension income specialist or a more detailed recommendation from an independent financial adviser.

You could receive more pension income with Age Partnership

Speaking to a retirement specialist or pensions adviser at Age Partnership's Pension Income Service could increase your pension pot. They can talk through all your options and help you decide on the best way to make the most of your pension pot.

Age Partnership’s award-winning team can also compare the leading providers on the market - Aviva, Standard Life, LV, Prudential, Canada Life, Hodge Lifetime and others - to find the best solution for you.

So confident are they of finding you the best pension income deals that they will give you a £100 if you find a better like-for-like annuity quote.

Calculate your pension income now

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