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How to take your pension in 2020

Tips and tools to help you make the right decisions, so you can make the most of your retirement.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

There are three main ways to take your pension, each with their own risks and benefits. If you’re planning to retire in the New Year, it’s important you understand your options first. After all, the decisions you make now could impact how you fund your lifestyle for the rest of your life.

In this short video, Tom McPhail (our Head of Retirement Policy) explains how each option works, and why you might consider choosing more than one.

Please remember this article and video aren't personal advice. If you're not sure of the suitability of an investment for your circumstances seek personal advice.

Your retirement options explained

Read transcript

What are my retirement options

Tom McPhail, Head of Retirement Policy at Hargreaves Lansdown speaks to camera in a suit with a blue background

Tom McPhail:

"You've been building up your retirement savings and now might be the time when you're thinking of taking some money out you'll probably want an income and you might want to take an initial lump sum - for example for some home improvements or to pay off some debt but there are a number of ways you can do this so it's worth taking the time to consider your options and see which ways will work best for you. Generally the earliest you can take your pension is age 55 usually you can take up to a quarter of it tax-free with the rest taxed as income when you take it out. I'm now going to quickly walk you through the three different ways you can take money out of your pension."

Option 1 - Annuities: A Secure Income for life

"Some bills never stop so for piece of mind you could make sure that your essential expenditure is covered with a secure income you always have the option to convert some or all of your pension savings to an annuity which will pay you a guaranteed income for life. At the start you can choose different options like inflation protection or a continuing income for your partner or spouse after your death it's important to get quotes from the whole market as different providers will offer the best rates at different times and make sure you confirm health and lifestyle details as these can boost your income. Annuities can't be changed once set up so you need to choose what's right for you and get the best deal you can."

Option 2 - Drawdown: A Flexible Income

"With drawdown you keep your pension invested and draw an income whenever you need to if your investments perform well and you don't take too much out you could enjoy a rising income but the danger is you could run out of money if your investments perform poorly or you take out too much too early or you live longer than expected this means it's a higher risk option than an annuity so it won't be right for everyone."

Options 3 - UFPLS: One-off Lump Sums

"With annuities and drawdown you take the tax-free cash at the start. With lump sums or uncrystallised funds pension lump sum to give them their full name, UFPLS for short, it's different. 25% of each lump sum is usually tax-free with the rest taxable while the remainder of your pension pot stays invested. This means the risks are more like a drawdown plan and it's a higher risk option than an annuity. There's more information about these options on our website you can also use the government's pension wise service for impartial guidance on these options."

All investments fall as well as rise in value, so you could get back less than you invest. Tax rules change and their benefits depend on your individual circumstances. If you are unsure of the suitability of an investment or course of action for your circumstances, please seek advice. You can find out more about Pension Wise on our website.

Why you should speak to an expert

What you do with your pension is an important decision. You need to make sure you understand your options and their risks, so you can make the right decisions for your situation. Like with any big decision, it can help to talk things through.

The government offers a free service, Pension Wise, giving impartial guidance to help you make sense of your pension options.

If your situation’s more complicated, or you’d like reassurance that what you plan to do is the right thing, you could consider paying an adviser for personal advice. Our advisory service can help direct you to the most suitable solutions for your circumstances and future goals.

How to compare your options

To help you decide how to access your pension, and which options suit your needs best, you can request quotes and projections from your pension provider. These will help you work out how much income you could get using each option and how long that income might last. The earliest you can normally access your pension is age 55 (rising to 57 by 2028).

It’s a good idea to shop around with different pension providers. Your existing pension provider may not offer the most competitive rates or all the options available.

A secure, regular income in retirement

An annuity provides a guaranteed income for life and could offer you the peace of mind you’ve been looking for. Our annuity quote tool can help you search the market for the best rates available so you can see how much income you could get. Quotes are valid for a limited time only, so check regularly to see what you could receive.

Remember to confirm details about your lifestyle and any health problems you have (or have suffered from in the past). This could mean you get a better rate and more income. Even just confirming your height, weight and alcohol intake can make a big difference.

Be flexible in retirement

If you want a more flexible income, you might consider keeping your pension invested, so you can dip in and out of it when you need to. You can do this through drawdown or by taking lump sums.

We can show you how drawdown and lump sums might work. We offer illustrations for both, which can give you an idea of how charges, withdrawals and different investment returns could affect your pension value. Ultimately, you’ll get an idea of how long it could last and what might be left to pass on.

The value of all investments can go up and down in value. So you could get back less than you invest.

Drawdown illustration

Lump sum illustration

Why it’s important to plan for tax

Usually, up to 25% of your pension can be paid to you tax free, but after that your withdrawals will be taxable. The amount of tax you pay will depend on how much you withdraw and how much other income you’ve received in the same tax year.

Our pension income tax calculator could make it easier to understand how this works, and help you avoid any nasty surprises. Remember, pension and tax rules can change and the value of any benefits will depend on your circumstances.

We have a range of tools and investment resources to help you plan your own finances but, like this article, they aren’t personal advice.

Want to find out more?

Your full guide to retiring next year

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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