Choices at retirement
When you finally leave work you must decide how you will turn the pension fund you’ve built up into a retirement income. Your choices then are becoming wider and more flexible. Currently they are:
Tax-free lump sum
Under current rules, your pension scheme will allow you to take part of your pension fund – typically up to 25% – as a tax-free lump sum to spend or invest as you want. The rest of the fund must be used to ‘buy’ a retirement income, which is taxable.
Get expert advice if you are unsure whether or not to take the lump sum.
Annuities
Annuities are currently the most common way of ‘buying’ a pension income. You hand over your pension fund to an annuity provider such as a life insurance company, and in return they agree to pay you an income for the rest of your life.
The income an annuity offers depends on how long you are expected to live, interest rates and other factors such as the basis on which the annuity is paid to you.
You are free to shop around different providers for the most attractive annuity rate – financial advisers and special annuity services can do this for you.
Income drawdown
Becoming more popular, income drawdown is aimed at people who don’t want to lock themselves into an annuity as soon as they retire.
Income drawdown allows your pension fund to remain invested – so it can potentially continue to grow – while letting you take an income within strict limits.
This can be complex, so financial advice is essential – and income drawdown is recommended only for people with larger pension funds – say worth £100,000 or more.
Under current rules, a drawdown scheme must still be used to buy an annuity by age 75.
More choice, more flexibility
Because the government is so keen to encourage more of us to save for retirement, it is constantly looking for new ways to make pensions more flexible and give people more choices at retirement.
Ask your plan administrator about the latest options – so you can get the best range of opportunities possible to make your pension a real success!
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