Enjoying the benefits of your pension

After years spent building up your pension fund, when the time comes to enjoy the benefits it’s important to know all the options and how they can be combined to best suit you.   

What are the options?  

Taking a tax-free lump sum 

One of the many tax benefits of pensions is the ability, in most cases, to take part of your pension fund as a tax-free lump sum. You can normally take up to 25% of your fund*. 

Most personal pension arrangements allow you to take a tax-free lump sum from age 55 (though this is set to rise to 57 from April 2028). You don’t have to stop work or retire to access your lump sum. 

If you don’t want to take all the lump sum in one go, there are options, which your NFU Mutual Financial adviser can explain.  

 *The total amount you can take as a tax free lump sum across all your pensions is capped at £268,275 unless you have registered for HMRC protection at a higher amount  

Annuities  

The traditional approach to taking money from a pension is to take a tax-free lump sum, before handing the rest over to an insurance company in exchange for a guaranteed income payable for the rest of your life, known as a Lifetime Annuity.  

You can choose to build in other benefits when you buy, these include:  

• An annual increase in the income you receive, at a set percentage or linked to inflation.  
• A guarantee that in the event of your death, the income will continue to be paid to a nominated person for the rest of their life, at the same or a reduced level.  
• A guarantee that the payments will continue for a minimum period of up to 30 years even if you (and your nominated person) both die during that period.       
• 100% capital protection, which means that in the event of your death, the difference between the amount you paid for your annuity less the payments you’ve received will be repaid to your family.            

When buying an Annuity, it’s important to shop around or ask your NFU Mutual Financial Adviser to do it for you, as Annuity rates can differ significantly between providers. It’s also vital to let the provider know if you have any health conditions or lifestyle choices such as smoking, as this can result in a higher level of income through an Enhanced Annuity.  

One drawback of a Lifetime Annuity is that you cannot normally change your mind once you’ve bought it. One alternative is a Fixed Term Annuity which can provide a guaranteed income for a set period, normally between 3 and 20 years, at the end of which you decide whether to buy a different type of annuity or take a variable income or lump sum from any amount returned to you.     

Income Drawdown  

One of the most popular ways to take an income from a pension is through ‘Income Drawdown’. This allows you to leave your money invested and vary the amount of income you take to suit your circumstances. Because the money remains invested, it has the potential to grow, but it can also fall in value and there is the risk that you may exhaust the pot and run out of money later in life.    

If you’re still working or plan to in the future, it’s important to know that if you take taxable income from your ‘Income Drawdown’ pot this will limit the amount you and your employer can pay into your pension to £10,000 each tax year.     

Combining drawdown and an Annuity  

If you need the security of a guaranteed level of income you could choose to use part of your fund to buy a fixed term or lifetime annuity, while leaving the remainder invested in Income Drawdown. You can then use your Income Drawdown pot to provide an additional income that you can increase, decrease, stop or start to suit your circumstances. This also gives you the potential to benefit from any future growth on your Income Drawdown funds.    

Income Drawdown first and an Annuity in later life   

Many people gradually reduce the hours they work as part of a phased retirement and opt to go into Income Drawdown, initially taking small amounts of income which gradually increases as their salary or profits from work reduces.  

This approach allows you to delay any potential Annuity purchase to a time when interest rates may be higher, or you suffer a health issue which may allow you to secure a higher income through an ‘Enhanced Annuity.'  

Fixed term Annuity until state pension age  

A Fixed Term Annuity can be particularly useful if you need a guaranteed level of income for a specified period. This may be the case if you’re retiring before state pension age and need a "bridge" of guaranteed income until your state pension kicks in. 

Summary

It is important to remember that every person’s circumstances are unique, and the variety of options highlighted above demonstrates some of the flexibility on offer through pensions. So, please arrange an appointment with an NFU Mutual Financial Adviser to talk you through what’s best for you.