Retirement Options Guide

The range of retirement income options available to pension holders has never been higher. In 2015, the U.K. government brought ‘Pension Flexibilities’ legislation into effect, which gave individuals freedom to decide how they wish to access their pension benefits. It is important to understand these options

Following the ‘auto enrolment’ legislation that came into effect from 2012, most individuals will rely on their workplace pension to supplement their income through their retirement. Workplace pension schemes are the largest source of pension savings in the UK, with around 83% of full-time employees holding a workplace pension as of 2018. The majority of workplace schemes have transitioned away from the old staple of ‘defined benefit’ (final salary) schemes and now usually employ a ‘defined contribution pension’. With a defined contribution pension, the size of your fund is directly related to your personal and employer’s pension contributions. As defined contribution schemes provide a wider range of pension income options, it is important to understand these options fully before making a decision.

We have tried to provide you with a brief overview/explanation of each of these options below however, for more information we recommend the website, ‘Pension Wise’. Pension wise offers a free and impartial government service that helps you understand the options available for your pension pot. The website is managed by the UK government and even offers a free appointment to help answer your pension queries.

Secured Income Options

  • Regular income, secured for the rest of your life.
  • Tax free lump sum paid at outset known as a ‘Pension Commencement Lump Sum’ and the balance of your fund is used to purchase an annuity.
  • Your annuity income is paid at least annually and can increase or remain level in payment.
  • Additional options can be selected at outset such as annual increases, spouse’s benefits or guarantees which reduce your own income.
  • Once you have bought your annuity, you usually cannot change your mind or change benefits. On death, there may also be the option of a capital payment less tax.
  • A scheme pension is provided from a defined benefit (final salary) scheme and will either be paid by the scheme itself or a sponsored insurance company.
  • Like a lifetime annuity, a scheme pension will provide a regular income, secured for the rest of your life.
  • Tax free lump sum paid at outset known as a ‘Pension Commencement Lump Sum’ and the balance of the fund is used to provide income for life.
  • Income is paid at least annually and can increase or remain level in payment.
  • Additional options may be offered at outset such as annual increases, spouse’s benefits or guarantees which reduce your own income.
  • Once in payment you cannot change your mind or change the benefits.
  • The state pension is a government backed pension scheme that will provide you with an income for life.
  • The state pension is accrued through your National Insurance Contributions.
  • Individuals who reach state pension age (currently 65) after April 2016, will need 35 qualifying years of NICs to acquire the maximum state pension.
  • As of tax year 2020/21, the maximum State Pension will provide you with £175.20 per week (around £9,100. Per annum).
  • For the majority of people, the state pension will need to be supplemented with additional pension savings to provide sufficient income for retirement.

Flexible Income Options

  • Part of your fund and part of your tax free cash are used in segments to provide income.
  • The balance of the fund not used for income/tax free cash, but remains invested with a view to providing higher future benefits.
  • Your starting annuity is smaller, but is supplemented by a portion of your tax-free cash sum.
  • Each year you decide how much your fund to use for annuity purchase and how much tax free cash is used to supplement your income.
  • Because you don’t commit all your funds to buy an annuity immediately, you keep your options open.
  • Tax free cash lump sum known as a ‘Pension Commencement Lump Sum’ paid at outset and fund remains invested. Income can also be selected if required.
  • The balance of the fund not used for income remains invested with a view to providing higher future benefits.
  • You can choose the income you want, and when you want it, between nil and 120% of an equivalent single life annuity.
  • If investments do well, you may benefit from higher future income payments, and vice versa.
  • On death, the remaining fund is available to pay benefits to your family or dependants.
  • Withdraw the whole balance of your pension pot as cash, with 25% of the pot paid out tax free. This is known as an Uncrystallised Funds Pension Lump Sum or ‘UFPLS’.
  • Immediate access to the entire fund.
  • No maximum withdrawal. Must prove a ‘secured’ fixed pension income of at least £20,000 pa from other pension sources.
  • If the entire plan benefits have been taken, there is no further payment on death.
  • If the individual chose to access only some of the funds, remaining options on death (as under capped) remain an option.
  • Tax free cash lump sum known as a ‘Pension Commencement Lump Sum’ is paid at outset and the balance of the pension remains invested in an ‘uncrystallised state’. Income can also be selected if required.
  • The balance of the fund not used for income remains invested with a view to providing higher future benefits
  • You can choose to take the money from your pension if and when you want it, in line with drawdown – some plans offer an income ‘lock in’ guarantee.
  • If investments do well, you may benefit from higher future income payments. Some plans offer an investment growth ‘lock in’ guarantee.
  • On death, the remaining fund is available to pay benefits to your family or dependants, depending on plan type selection.

If these options seem confusing or complicated, you are not alone. Although not mandatory, many people seek financial advice from a professional financial adviser before taking pension benefits. An adviser can help to explain much of the jargon surrounding pensions, as well as advise you on both pension funding pre-retirement and pension income planning at retirement. In addition to standard retirement planning, an adviser at SIP Wealth Management can also help with more specialist areas of pension advice including:

  • Auto Enrolment
  • Self-Invested Personal Pensions (SIPP)
  • Small Self-Administered Schemes (SSAS)
  • Annuity Purchase
  • Income Drawdown
  • Lifetime Allowance Issues
  • At Retirement Options

If you feel you would like to explore any of these options with us, please fill out an enquiry contact form to find out more.