Turning your pension savings into your income
From April 2015, there will be fewer limits or constraints on what you can do with any pension savings you have in defined contribution (‘DC’) pension arrangements. If your fund is large enough, you could:
After you have decided whether or not to take any tax free cash, the main options you should consider, are:
An annuity is an insurance contract that allows you to turn your pension account into a regular income after you retire. You can shop around different insurance companies and get the best annuity to suit your circumstances.
When you find the best annuity for you, you give the insurance company the balance of your pension account (after you have taken any tax free cash). In return, the insurance company will pay you a regular income for the rest of your life based upon the contract you have agreed with them.
Drawdown means you can continue to keep your pension invested and draw an income from your account. There are limits on how much income you can take but, from April 2015, there will be no restrictions and no minimum income requirements.
From April 2015, you will be able to take all of your DC pension savings as cash irrespective of how much you’ve saved. This might attract many people, but the tax implications can be significant.
Choose a combination of ways to pay you your income in retirement
If your fund is large enough, you could use some of your money to buy an annuity and leave the rest in drawdown (perhaps having already taken 25% as a tax free lump sum).
Tax free cash is a popular option
Some people put it aside as ‘rainy day’ money to cover unexpected expenditure; others use it to pay off their mortgage or credit cards. Most people can take up to 25% of the value of their DC pension account tax free.
So if your account is worth £100,000, you should be able to take £25,000. In some instances, the tax free cash may be more or less than the normal 25%.
These are the main choices, but new solutions are likely to emerge over time.
To help you decide what may be right for you, here are some of the issues you should consider.