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Retirement income options tool

Learn about your retirement options, compare different income options and get guidance on your next steps.

Watch this short video of financial journalist Paul Lewis explaining how much you'll need in retirement. Download the video transcript

What should I consider?

Whether you're planning to retire fully, or gradually, you now have more choice and flexibility in how you provide you and your family with an income in retirement.

Many of us are living longer so the chances are you will be retired a long time. It’s therefore important to make sure you have enough secure income so you’re not worrying about how to pay the bills.

Security & flexibility

Retirement can last for 30 years or more depending on when you retire and how long you live.

Estimating how long your retirement will be is difficult as few of us know how long we're going to live. You need to bear this in mind when deciding what to do with your retirement savings – they may have to last longer than you think.

You may also want to make provisions for any family or dependants you have so that they receive an income and/or inherit any unused money from your pension pot when you die.

Once you’re 55 you have complete freedom over how you use your pension pot. But you still need to ensure you have enough secure income throughout the whole of your retirement so that you can make ends meet.

A good place to start is by working out what income you’ve got and how much you’ll need.

What have you got?

Most people have more than one source of income in retirement.

Secure income

This is any income that is regular and guaranteed for life such as:

  • your State Pension
  • a pension from a defined benefit scheme (also known as an employer’s salary-related pension scheme such as a final salary or career average scheme)
  • income from a lifetime annuity

Flexible income

This is income you hope to get but the amount might vary and it’s not guaranteed to last for the whole of your retirement. This includes income from:

  • paid work
  • a drawdown scheme (where your pension pot remains invested but you can opt to draw an income from it)
  • savings and investments
  • renting out a room in your home
  • any rental property you own.

What else will you have?

You may have non-pension assets which could affect what you decide to do with your pension pot. These might include:

  • your home – you may plan to sell your home and buy a cheaper one in order to release some cash
  • other property which you could sell or rent out
  • savings and investments
  • personal possessions you plan to sell such as a car, jewellery, antiques etc.

If you have any outstanding loans, a mortgage or credit card debts, paying these off may seem a good idea. This would reduce your monthly spending and the amount of income you need in retirement. But it would also reduce the amount of money you have available to provide yourself with an income in retirement. This is the sort of decision that requires careful thought and which you may want to take advice on.

How much will you need?

It’s not just your income that’s likely to change in retirement, your spending will too. For example, you may no longer have to pay fares to get to work but if you spend more time at home your household bills may increase.

If you draw up a budget of how much you’re likely to spend when you retire you will have a clearer picture of how much income you need and this could help you decide what to do with your pension pot.

The basics

You'll need a secure source of income to pay for life's basics such as food, bills and clothing.

Independence & flexibility

With your basics covered, it's safe to invest your money in things like a car, savings or home improvements.

Life's little luxuries

With your living expenses covered, luxuries such as a daily cappuccino, gifts or holidays are within reach.

Tax

Your pension income is taxable just like any other income.

When you’re ready to start using your pension pot, you can usually take up to 25% of it as a tax-free lump sum. The rest can be used to provide you with an income and/or irregular lump sums, both of which are taxable. The amount of Income Tax you have to pay depends on your total income for the year.

Alternatively, you can take cash lump sums from your pension pot. The first 25% of any lump sum is usually tax-free and the rest is taxable. The taxable amount is added to the rest of your income for the year and you pay Income Tax on this in the usual way.

In both cases, if the amount of taxable cash you take pushes your annual income into a higher tax bracket, you’ll have to pay higher-rate tax (or even additional-rate tax) on the part of your income that falls in that band.

Income Tax rates 2016-2017
Income Tax band Your income Income Tax rate
Your personal allowance 1Definition of Your Personal Allowance Up to £11,000 0%
Basic rate £11,001 - £43,000 20%
Higher rate £43,001 - £150,000 40%
Additional rate Over £150,000 45%

1 The personal allowance is the amount of income you can have before you have to start paying Income Tax. When your income is over £100,000, your personal allowance reduces by £1 for every £2 above the limit.

Working out when and how much cash to take from your pension pot so that you don’t end up paying more tax than you need to can be complicated and you may want to take financial advice on this.

Annual allowances

The maximum amount you (and your employer) can contribute to your pension each year and receive tax relief on is £40,000 (or the amount you earn if that’s less). The £40,000 annual allowance will be reduced if you have an income of over £150,000, including pension contributions. If you’re not earning, you can still get tax relief on contributions up to £3,600. Any contributions above this you pay Income Tax on.

Tax relief on future pension savings

If you start using your pension pot (you may want to take some cash or a flexible income), the maximum pension contributions you can then get tax relief on may fall to £10,000 (or the amount of your earnings if that’s less). This is called your money purchase annual allowance (MPAA).

Lifetime allowance

The maximum pension savings you can build up without incurring a tax charge when you draw out your savings (and without leaving a tax charge for your beneficiaries if you die before age 75) is £1m. If your pension pot is worth more than this, you’ll pay tax (25% on income and 55% on cash lump sums) when you withdraw the excess amount.

Health and longevity

People are living longer than they used to. A 65 year old man now has a 50% chance of living to 87 and a 65 year old woman has a 50% chance of living to 90.

Many people underestimate how long they’re going to live. This is not a problem if you have a guaranteed income for life. But if you don’t, you need to make sure you don’t run out of money so that you have enough to live on for the whole of your retirement. At the same time, you don’t want to live more frugally than you actually need to because you’re worrying too much about running out of money.

Your health may become an issue as you get older. So you may want to set aside some money or have a rising income so that if your health does deteriorate you can afford to pay for extra help around the home or for care fees.

Inflation and risk

Prices tend to rise over time. If your retirement income does not keep up with rising prices (inflation) then you may struggle to make ends meet as you get older.

To maintain your standard of living, you need your income to keep up with inflation. You may do this by buying an insurance policy that gives you a guaranteed income for life (a lifetime annuity) that changes with inflation each year.

Your State Pension will keep up with inflation as it rises by at least this amount each year.

If you’re relying on savings and investments to provide you with an inflation-proof income then the amount of interest or income they earn needs to keep up with inflation too.

If you don’t use your pension pot to secure yourself a guaranteed income in retirement but instead leave your pot invested, you need to decide how much risk you’re comfortable taking with your money. If your investments fall in value so will the value of your pension pot. On the other hand, your investments could increase in value and this means you would have a bigger pension pot.

Inheritance

You may want to leave some or all of your pension savings and/or the income from these to your dependants when you die. This may affect the retirement income options you are considering and may mean you have to accept a lower income in retirement.

Your choices may also be influenced by the way that any pension savings or income you leave your dependants is taxed.

Whether you opt for an annuity, drawdown or leave money in your pension pot, it’s essential you complete an expression of wish form to say who should inherit any cash or income due from this. If you don’t, your retirement product provider may not know who should inherit this and your heirs may have to pay unnecessary Inheritance Tax.

When you die, whoever is dealing with your estate must notify your pension provider of your death.

What happens to your pension pot when you die
Money inherited from your pension pot If you die before age 75 If you die aged 75 or older
Lump sums Any lump sum claimed within two years is paid tax free 2See exceptions Any lump sum paid to your beneficiary is added to the rest of their income for the year and taxed at their appropriate tax rate.
Income Any income claimed within two years is paid tax free 2See exceptions Any income paid to your beneficiary is added to the rest of their income and taxed at their appropriate tax rate.

2 Any lump sum or income claimed more than 2 years after notification will be added to the beneficiary’s income and taxed at their appropriate rate.

Your sources of income

Explore where your income in retirement may come from. This will help you decide how best to use your pension pot.

Retirement is no longer the cliff-edge it once was. Many people choose to work longer or retire gradually which means they don't have to rely on just their pension income.

If you carry on working you may continue contributing to your pension so that you have a bigger pot when you eventually give up work altogether.

Bear in mind that you may have to stop working sooner than you would like if you develop health issues.

State Pension

Most people qualify for at least some State Pension when they reach their State Pension age. This provides you with a secure income for life which increases by at least the rate of inflation each year.

If you’re still working or have enough income from other sources once you reach your State Pension age, you may decide to defer taking your State Pension so that you receive a higher income from it later on. But be aware that the deferral rates for people who reach State Pension age on or after 6 April 2016 will not be as generous as they currently are.

You may be able to make extra payments to maximise your State Pension if you don’t yet qualify for the full amount.

When you die your State Pension stops but your spouse or civil partner may be able to boost their own State Pension based on your contributions. This only applies to people who reach State Pension age before 6 April 2016.

If you are a member of a defined benefit scheme (also known as an employer’s salary-related pension scheme such as a final salary or career average scheme) you will receive a pension from these based on how long you worked for the organisation and how much you earned.

This pension is a secure income for life, it usually increases over time and often provides an income for your dependants if you die before them. You can usually take up to 25% of your pension entitlement as a tax-free lump sum at the outset, but the more cash you take the lower the income you will get.

You cannot take all of your salary-related pension as a cash lump sum. If you want to do this you will have to transfer out of your salary-related pension scheme into a personal pension (if you’re allowed to) and this is not usually a good idea. If your pension is worth £30,000 or more you will have to take advice from a regulated financial adviser before you can transfer.

Savings and investments

You may have savings or investments which will provide you with some income in retirement. This income is likely to be variable and there’s no guarantee it will rise over time.

The amount of interest you earn on your savings will depend on interest rates which change over time. If you have stock market investments, the income from these may change depending on the types of investments you choose and how well they perform.

If you take more than the income or growth on your savings or investments, this will reduce the amount of income they earn. You will also have less savings left for the future.

The income you get from your savings and investments is usually taxable unless they are in a tax-efficient savings scheme such as an ISA.

Any savings or investments you have when you die can be passed on to your heirs.

It’s worth noting that all your savings and investments (even if they’re in an ISA) may be added to your estate when it’s assessed for Inheritance Tax.

Property

You may have property which provides you with some income. This could be your own home (you may have a lodger) or rental property you own.

You may plan to sell or release some equity from your property to provide you with extra income or to pay for care in later life.

If you decide to sell your own home and downsize you need to take into account any costs involved as this can significantly reduce the amount of cash you raise to provide yourself with extra income.

If you sell any other property you may have to pay Capital Gains Tax on any increase in value you make.

State benefits

You may be entitled to certain state benefits, like Pension Credit. Nearly all benefits are means-tested and so may be affected by how much income or capital you have, so you need to bear this in mind when deciding what to do with your pension pot.

Other income

This could include income you receive from a trust, a survivor’s pension, inherited income such as from a deceased spouse’s pension, gifts from family or friends.

Some of this may be secure income which increases over time and is paid for life. Other income may be ad-hoc or not guaranteed so you will not be able to rely on it.

Your pension pot options

Watch this short video of financial journalist Paul Lewis explaining what you can do with your pension pot. Download the video transcript

You now have more freedom over what you can do with your pension pot. Here we explain what your options are, what you need to think about and how much you might get so that you can decide what might be best for you.

If you have built up a defined contribution pension (this is a personal or workplace pension where you have built up your own pension pot) it’s up to you to decide what you do with this.

Provided you’re 55 and over (younger if you’re in very poor health) you have complete freedom over what you can do with your pension pot. You can leave it where it is, carry on contributing to it, use some or all of it to provide yourself with an income in retirement, take some or all of it as cash or a combination of these.

Leave your pension pot untouched

If you already have enough income to live on – either because you’re still working or you have stopped work but have other income from savings or investments – you may be able to delay using your pension pot beyond your selected retirement date, or your scheme’s normal retirement date.

Most people will want to continue building up their pension pot so that they have more money when they retire.

Is this option right for you?

  • Security/flexibility
    • Your pension pot can continue to grow tax-free until you need it and a bigger pot could mean more income when you start taking money out.
  • Health and longevity
    • If you’re in good health and don't need this money you can leave it until you do.
  • Tax
    • If you want to build up your pension pot further you can continue to get tax relief on pension savings of up to £40,000 each year (tax year 2015-16) until age 75.
    • If the value of your total pension savings (that’s private and work pensions but not your State Pension) is above the lifetime allowance, you’ll have to pay extra tax when you access your pension savings and at age 75 if you still have money in your pot.
    • The lifetime allowance is currently £1.25m but this falls to £1m from 6 April 2016. If this is likely to affect you, you may well want to speak to a financial adviser.
  • Investment risk
    • The value of pension pots can rise or fall. Remember to review how your pot is invested as you get closer to retirement and move it to less risky funds if necessary.
  • Inheritance
    • If you die before you’re 75 the whole of your pension pot is passed on tax-free. If you die aged 75 or over your beneficiary will pay 45% tax on any lump sum payments made between 6 April 2015 and 5 April 2016 or Income Tax at their highest rate if taken as income. Any amounts they take out after this – lump sum or income – will be added to their income and taxed at their highest tax rate.

How much could you get?

If you delay taking your pension pot, see how much this may grow.

This table shows how your pension pot might grow over time. The figures take inflation into account (see assumptions below) and are in today’s money.

For example, if you have a £50,000 pension pot and contribute £200 a month, in five years’ time this will have grown to £74,900. When you take inflation into account this would have the buying power of £66,200 in today’s money.

Years of growth Pot size
1 £10,171
3 £10,521
5 £10,883
10 £11,845
15 £12,891
20 £14,030

These numbers use the following assumptions:

  • Investment growth of 5% per year
  • Product/fund charge of 0.75%
  • Inflation of 2.5%

Buy a guaranteed income for life - an annuity

Ask your existing provider if your pension scheme offers a ‘guaranteed annuity rate’. If it does, this may provide a highly competitive income which you may not want to lose.

A lifetime annuity provides you with a regular retirement income for life – with the guarantee that the money won’t run out before you die.

Lifetime annuities include:

  • basic lifetime annuities - these offer a range of income options to suit different personal circumstances and attitudes to risk.
  • investment-linked annuities - with these your income will vary depending on the performance of the funds your annuity invests in. This means your income could fall below the amount you need.
  • flexible annuities - these offer flexibility over income payments, investment options and death benefits.

Annuities can have various features you can choose from such as:

  • payments which increase each year by a fixed amount or change in line with inflation
  • providing your partner with an income if you die before them
  • a guarantee period to ensure the income is paid for a minimum amount of time even if you die before this
  • value protection is designed to pay your nominated beneficiary the value of the pot used to buy an annuity less income already paid out when you die.

Is this option right for you?

  • Security/flexibility
    • You receive a secure income for life. Once you’ve agreed the terms of the annuity you cannot change your mind later.
    • Although you cannot change your annuity back into a pension pot, the Government announced changes due to come into force from April 2016, that will allow you to sell your annuity for a cash lump sum on which you will pay Income Tax at your highest rate.
  • Health and longevity
    • The income is guaranteed for life, regardless of how long you live, so there is no risk of it running out.
    • If you have a medical condition, are overweight, smoke or have a poor lifestyle you may be able to get a much higher income so be sure to ask about this when applying.
    • If you have a very limited life expectancy, an annuity may not be the right option for you.
  • Tax
    • You can take up to 25% of your pension pot as a tax-free lump sum and use the rest to buy an annuity.
    • Income from an annuity is taxed just like any other income.
    • Your annuity provider will pay your income through a payslip and take off tax in advance – called PAYE (Pay As You Earn). This means you may pay too much tax and have to claim the money back – or you may owe more tax if you have other sources of income.
    • If you buy an annuity and then want to contribute to a pension, the maximum pension contributions you can now get tax relief on may change.

      If you buy a flexible annuity the maximum contributions you get tax relief on reduces to £10,000 (or the amount of your earnings if that’s less).

      If you buy a basic lifetime or investment-linked annuity, the maximum remains at £40,000 (or the amount of your earnings if that’s less). If you’re not earning, you can get tax relief on contributions up to £3,600.

      You pay Income Tax on any contributions above the maximum.

  • Investment risk
    • If you have a pension pot of £30,000 or more and are willing to take more risk in return for a potentially higher income, you could opt for an investment-linked annuity, which also guarantees to pay out for life, though not a set amount.
  • Inheritance
    • With a standard annuity (known as a single annuity) the income stops when you die and there is nothing to pass on to your dependants.
    • If you buy a joint annuity your partner will continue to receive an income after you die (this income will be tax-free if the annuity was bought on or after 6 April 2015 and you die before age 75, otherwise the income is taxable). This income is usually a proportion of the income you received and you will have to pay extra or accept a lower income for yourself for this benefit.
    • If you buy a value protected annuity and die before age 75, any lump sum paid out is tax-free. If you die aged 75 or over any lump sum will be taxable at 45% if paid before 6 April 2016 and at the beneficiary’s highest tax rate if paid after that date.

How much could you get?

Using your pot to buy an annuity, we’ll show you how much tax-free cash and guaranteed income you may receive.

Let's assume you take the maximum tax-free cash lump sum allowance of 25% of your pension pot (that's what most people do).

Pension pot size £10,000
25% tax free lump sum £2,500
Remainder after lump sum £7,500

You then use the remaining £7,500 to buy an annuity.

Table showing potential income for different single annuity options
Annuity option Annual income in 1st year Annual income in 30th year
Basic annuity £364 £364
Increasing annuity £254 £533
Guaranteed for 10 years £356 £356
If you have bad health £473 £473
Table showing potential income for different joint life annuity options
Annuity option Annual income in 1st year Annual income in 30th year
Basic annuity £331 £331
Increasing annuity £224 £470
Guaranteed for 10 years £331 £331
If you have bad health £387 £387

These numbers use the following assumptions:

  • For a basic annuity male aged 65
  • Living in Swindon
  • Spouse is 65 and healthy
  • For the health annuity we assume the applicant is an overweight smoker with high blood pressure
  • Income is paid monthly in arrears and is a gross amount which is subject to Income Tax.

Take a flexible retirement income - drawdown

This is where you move your pension pot into an income drawdown scheme called flexi-access drawdown. Your money is then placed in various investments and you can draw an income from this that suits you. This scheme can be with your own or another pension provider.

You can continue to contribute to your pension pot if you choose but there are limits on the amount you can invest each year.

Is this option right for you?

  • Security/flexibility
    • You can choose how much income and what lump sums you take. But this income is not guaranteed for life. If your investments fall in value you may have to adjust the amounts you take so you don’t run out of money later on.
    • To help provide more certainty, you can at any time use all or part of the funds in your income drawdown to buy an annuity or other type of retirement income product.
  • Health and longevity
    • You need to carefully plan how long your money needs to last you in retirement. If your retirement is longer than you plan for, you could run out of money.
  • Tax
    • You can choose to take up to 25% of your pension pot as a tax-free lump sum at the outset and you then pay your highest rate of tax on any withdrawals.
    • Your drawdown provider will pay the cash through a payslip and take off tax in advance – called PAYE (Pay As You Earn). This means you may pay too much tax and have to claim the money back – or you may owe more tax if you have other sources of income.
    • The maximum pension contributions you can now get tax relief on falls to £10,000 (or the amount of your earnings if that’s less). If you’re not earning, you can still get tax relief on contributions up to £3,600.

      You pay Income Tax on any contributions above the maximum.

  • Investment risk
    • If your investments perform poorly your pension pot will fall in value. You may be forced to cut your retirement income or risk running out of money.
    • Investment choice is key - you will need to keep your funds under regular review to ensure they continue to meet your long-term retirement income needs.
  • Inheritance
    • If you die before you’re 75 the whole of your pension pot is passed on tax-free. If you die aged 75 or over your beneficiary will pay tax of 45% for any lump sum they take before 6 April 2016, or Income Tax at their highest rate if taken as income. For payments after this date – lump sum or income – your beneficiary will pay Income Tax.

How much could you get?

Using your pension pot to buy a flexible drawdown income, we’ll show you how long this income can potentially last for.

Let's assume you take the maximum tax-free cash lump sum allowance of 25% of your pension pot (that's what most people do).

Pension pot size £10,000
25% tax free lump sum £2,500
Remainder after lump sum £7,500

You then use the remaining £7,500 to provide a flexible drawdown income.

With an investment growth at This may provide an income for If you require income for 30 years this means
5% 6 years, 6 months You will be without an income for 23 years, 6 months
2% 6 years You will be without an income for 24 years, 0 months
0% 5 years, 8 months You will be without an income for 24 years, 4 months
-2% 5 years, 4 months You will be without an income for 24 years, 8 months
-5% 5 years You will be without an income for 25 years, 0 months

These numbers use the following assumptions:

  • Income is the paid monthly in arrears and is gross amount, which is subject to Income Tax
  • Income increases each year with inflation, at 2.50%
  • Drawdown product charge of 0.50% a year
  • Investment charge 0.75% a year
  • 25% tax-free cash is deducted from pension pot.

Take small cash sums

You can leave your pension pot invested and take out lump sums when you need them. Not all schemes will necessarily provide this option. Your pension provider may only let you make up to a maximum number of withdrawals each year. Note that, unlike with flexi-access drawdown, your pot isn’t re-invested into new funds specifically chosen to pay you a regular income.

If the value of your pension pot is £10,000 or more, once you exercise the cash withdrawal option, the annual amount of defined contribution pension savings on which you can get tax relief is reduced.

Is this option right for you?

  • Security/flexibility
    • This option won’t provide a regular income for you, or for any dependant after you die.
    • Your pension pot reduces with each cash withdrawal.
  • Health and longevity
    • The earlier you start taking money out the greater the risk that your money could run out – or what’s left won’t grow sufficiently to generate the income you need to last you into old age. Remember – your pension pot needs to fund not just your immediate needs but also your expenses in the future.
  • Tax
    • The first 25% of any withdrawal is tax-free and the rest is taxable.
    • The amount of tax you have to pay on the taxable part of this income will depend on your total annual income from all sources. If the lump sums push your total annual income into a higher tax bracket, you will have to pay higher-rate tax or even additional rate tax on the amount that falls into the higher band(s).
    • Your pension scheme or provider will pay the cash through a payslip and take off tax in advance – called PAYE (Pay As You Earn). This means you may pay too much tax and have to claim the money back – or you may owe more tax if you have other sources of income.
    • The maximum pension contributions you can now get tax relief on falls to £10,000 (or the amount of your earnings if that’s less). If you’re not earning, you can still get tax relief on contributions up to £3,600.

      You pay Income Tax on any contributions above the maximum.

  • Investment risk
    • Because the investments in your existing pension pot are not designed to produce a regular retirement income and the value of these investments could fall it’s therefore especially important to keep it under regular review to reduce the chances of running out of money.
  • Inheritance
    • If you die before you’re 75 the whole of your pension pot is passed on tax-free. If you die aged 75 or over your beneficiary will pay tax of 45% for any lump sum they take before 6 April 2016, or Income Tax at their highest rate if taken as income. For payments after this date – lump sum or income – your beneficiary will pay Income Tax.

How much could you get?

Using your pension pot to take small cash sums, we’ll show you how much potential tax-free cash and annuity income you may receive compared to not taking a small cash lump sum.

Table showing impact on tax-free lump sum and potential annuity income by taking a lump-sum cash withdrawal
Option No withdrawal £0 withdrawal
Pension pot £10,000 £10,000
Withdrawal £0 £0 tax free
£0 taxable income
£0 total withdrawal
Potential value of your pension pot in 10 years, which could provide the following £11,845 £11,845
Tax-free cash £2,961 £2,961
Annual annuity income £296 £296

These numbers use the following assumptions:

  • Investment growth of 5% per year
  • Product/fund charge of 0.75%
  • Inflation of 2.5%
  • The current contribution is the total monthly amount
  • Annuity income is the annual amount that is paid monthly in arrears. The amount is gross, which is subject to Income Tax
  • Annuity amount is based on a male aged 65, in good health, and living in Swindon.

Take your whole pot as cash

You no longer have to convert your pension pot into a regular income if you don’t want to. You can take the whole lot as cash in one go if you wish. This means you close your pension pot and withdraw it all as cash.

Cashing in your pension pot will not give you a secure retirement income.

Is this option right for you?

  • Security/flexibility
    • This option won’t provide a regular secure income for you – or for your spouse or other dependants after you die.
  • Health and longevity
    • Most people will need their pension pot to provide retirement income. Cashing in your pot may mean you do not have enough income to last for your whole retirement.
  • Tax
    • The first 25% of your cash is tax-free but the rest is taxable.
    • The taxable lump sum (75% of your pot) is added to the rest of your income for the year and could push you into higher tax band(s).
    • Depending on the size of the lump sum and how tax is deducted, you may find you have overpaid tax and need to reclaim this.
  • Investment risk
    • If you spend the money you will miss out on any potential tax-free investment growth in your pension pot.
    • If you put the money into a savings account you will miss out on any potential investment growth but you will earn interest on your savings.
    • If you save or invest the cash, take advantage of tax-efficient ISAs where possible.
  • Inheritance
    • The money you’ve taken out of your pension pot will become part of your estate and be subject to Inheritance Tax.

How much tax will you pay?

Using your whole pot as cash could land you with a large tax bill, we’ll show you examples of how much tax you may pay.

Pension pot size £10,000
25% tax free lump sum £2,500
Remainder after lump sum £7,500

You may pay tax on the remaining £7,500. In the table below we’ll show you the potential tax you may pay when taking into account examples of other income you may receive in the same tax year.

Income £0k Income £20k Income £40k
Tax on income £0 £1,880 £5,880
Tax on income and pension pot £0 £3,300 £8,200

If you had an income in this same tax year, the total could push you into a higher tax bracket and you would be taxed more.

Mix your options

You don’t have to choose one option – you can mix and match as you like, and take cash and income at different times to suit your needs.

Which option or combination is right for you will depend on:

  • when you stop or reduce your work
  • your income objectives and attitude to risk
  • your age and health
  • the size of your pension pot and other savings
  • any pension or other savings your spouse or partner has, if relevant
  • whether you have any financial dependants
  • whether your circumstances are likely to change in the future

Is this option right for you?

  • Security/flexibility
    • You have total flexibility to do what you like with your pension pot but you may want to build in some security by using at least some of your pot to secure a guaranteed income for life.
  • Health and longevity
    • You need to carefully plan how you will use your pension pot to help provide you with an income in retirement. If your retirement is longer than you plan for, you could run out of money.
  • Tax
    • You can take up to 25% of your pension pot as a tax-free lump sum if you move it into income drawdown or buy an annuity.
    • If you withdraw cash sums from your pot in stages, 25% of each sum will be tax-free.
    • Where you withdraw a cash sum, your pension scheme or provider will pay the cash through a payslip and take off tax in advance – called PAYE (Pay As You Earn). This means you may pay too much tax and have to claim the money back – or you may owe more tax if you have other sources of income.
    • Depending on the size of the lump sum and how tax is deducted, you may find you have overpaid tax and need to reclaim this.
    • Once you’ve used some or all of your pension pot on a combination of the options, the maximum pension contributions you can now get tax relief on falls to £10,000 (or the amount of your earnings if that’s less). If you’re not earning, you can still get tax relief on contributions up to £3,600.

      You pay Income Tax on any contributions above the maximum.

  • Investment risk
    • This will depend on what you decide to do with your pension pot.
    • Investment choice is key - you will need keep your funds under regular review to ensure they continue to meet your long-term retirement income needs.
  • Inheritance
    • If you die before you’re 75 the whole of your pension pot is passed on tax-free. If you die aged 75 or over your beneficiary will pay tax of 45% for any lump sum they take before 6 April 2016, or Income Tax at their highest rate if taken as income. For payments after this date - lump sum or income – they will pay Income Tax.

Your next steps

These next steps will help you make the best choice for transitioning into retirement.

1 Make a budget

Draw up a budget to get greater control of your income and spending.

Create a budget and consider how it might change in retirement

2 Download and compare your pension pot options

Compare your pension pot options to see which are best for you.

Your pension pot options at a glance guide

3 Get your free Pension Wise appointment

A free and impartial government service that helps you understand your new pension options.

Go to the Pension Wise website

4 Shop around

5 Talk to a retirement adviser

We recommend you discuss your options with a financial adviser. Many pension options are irreversible so it’s important you choose wisely.

Find a financial adviser with our Retirement adviser directory

6 Take your time and save more

Delaying your pension gives you more time to understand your different retirement income options and work out which is best for you.

Find out how your pension pot can continue to grow using our Pension calculator.

Further information

Find out more about your retirement income options.

Useful information

Retirement

Pension pot options

Free guidance

Tax

Later life

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