Aged 55-65? Your pension options explained

Once you reach your fifties, the chances are you’ve started thinking about your retirement and how you might access your pension.

Mature couple walking on the beach at sunset or sunrise. They are having fun, laughing and smiling. The man has grey hair. Ocean in the background. Back lit with lens flare.

Once you reach your fifties, the chances are you’ve started thinking about your retirement and how you might access your pension.

Advertisement

Here, we look at some of the options available to you. Remember that if you’re not sure which course of action to take, you should seek professional independent financial pension advice.

Taking your tax-free cash

Under current pension rules, once you reach the age of 55, you can usually withdraw 25% of your pension as a tax-free lump sum if you want to.

So, for example, if your pension is worth £50,000, you can take £7,500 tax free. Your pension provider will then take tax off the remaining £42,500. If you don’t need an income from your pension straight away because you’re still working, you can keep the rest of your retirement savings invested until you need it. This is known as ‘flexi-access drawdown’.

If you do decide to take a tax-free lump sum from your pension, you can put it towards whatever you want. You might decide, for example, to pay off your mortgage, make home improvements, or gift money to loved ones.

As the rest of your pension is left invested, it can continue to grow until you need to take an income. Bear in mind though that like all investments, there’s risk involved, so there’s a chance you might not get back as much as you put in. Remember too that if you take a chunk out of your pension before you stop work, you’ll have less to draw an income from when you retire, increasing the chances that you could run out of money too soon.

Taking your tax-free cash gradually

Another option is to spread your tax-free entitlement over time.

If your pension provider allows you to do this, 25% of each withdrawal you make will be tax-free, with the remainder charged at your normal income tax rate. Taking out lump sums in this way is known in pension jargon as ‘uncrystallised funds pension lump sums’ (UFPLS).

You can only take UFPLS if you haven’t previously taken any tax-free money from your pension. Once you’ve opted for UFPLS, the amount you can pay into a pension and earn tax relief on falls from £40,000 to £4,000 a year.

Monitor your retirement savings

Remember that if you decide to take a tax-free lump sum and move your savings into drawdown, you can’t just forget about them until you retire.  Alistair Wilson, spokesman at insurer Zurich said: “Drawdown gives people much greater freedom and flexibility in retirement, but it doesn’t run on autopilot.

“Taking a small amount of time to regularly review your investment portfolio, and seeking financial advice or guidance, can help ensure your pension remains on track until you need to draw an income from it.”

Other ways to take an income

If you’re not comfortable with investment risk, you may decide you’d prefer to use your pension pot to buy an annuity, or income for life, instead.  The amount you’ll receive from an annuity will depend factors, such as your health, age and lifestyle.

Income from annuities doesn’t depend on investment performance, so you’ll know exactly how much you’ll get each year.

Advertisement

Working out how to take an income from your pension can be tricky, so always do plenty of research and get professional help if you’re not sure which option, or combination of options, may be right for you.