Your pension income options

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“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.

The earliest you can take your pension is age 55, rising to 57 from 2028. Usually you can take up to a quarter of it tax-free, with the rest taxed as income when you take it out. Here are three different ways you can take the money out of your pension.”

Annuities:

“Some bills never stop so for peace 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.”

Drawdown:

“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, 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.”

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 sums 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 (www.hl.co.uk/) you can also use the government's Pension Wise service for impartial guidance on these options.”

Important information - What you do with your pension is an important decision. You should check you're making the right decision for your circumstances and that you understand all your options and their risks. Tax rules can change over time and benefits depend on individal circumstances.

The government's free and impartial Pension Wise service can help you and we can offer you advice if you'd like it. The information in this video isn't personal advice.