Do you know your retirement options? Here's a quick guide.

Retirement is no longer a one-size-fits-all journey. With greater flexibility and more choices than ever before, understanding your retirement options is essential to building a secure and fulfilling future. Whether you're approaching retirement or just starting to plan, this quick guide outlines the key options available in the UK and how they might work for you.

In most cases, you can’t access your pension before age 55 (rising to 57 from April 2028). However, there are limited exceptions:

1. You retire due to ill health

1. If you're permanently unable to work due to serious illness, you may be able to access your pension early.
2. In some cases, if your life expectancy is less than a year, you may be able to take your entire pension pot as a tax-free lump sum (if under age 75 and within certain limits).

2. You have a protected retirement age:

1. Some older pension schemes (joined before 6 April 2006) may allow access before 55. However, you would need to check this with your pension provider.

Your Choices

There are a range of options available, and it is important to understand what these are, however, not all of these options will be available to you and they will depend on what your pension provider will allow.

Annuities

An annuity converts your pension into a guaranteed income for a set period or for the rest of your life. This can benefit individuals who want long-term income security and want to avoid taking investment risk.

When purchasing an annuity, there are several customisation options that allow you to tailor the income. Here are the main options: 

Single or joint life:

• Single Life: This income would stop on the annuitant’s death.
• Joint Life: This income would continue to a spouse or partner (based on a certain percentage selected at the start) after the annuitant’s death.

Payment Frequency:

• Monthly
• Quarterly
• Half-yearly
• Annually

Level or increasing:

• Level: This will pay the same amount of income.
• Escalating: This will pay an income that increases each year by a fixed percentage (e.g. in line with inflation). 

Guaranteed period:

• This will ensure that the income continues for a minimum period to the chosen beneficiaries if the annuitant dies early. 

Value Protection (also known as Capital Protection):

• This will return the unused portion of your original pension pot (minus payments already made) to your estate upon death. A percentage will be selected at the outset. 

Enhanced Annuity Option:

• If you have certain health conditions or lifestyle factors (e.g. smoking), you may qualify for a higher income. However, you would need to undergo underwriting during the application stage. 

Investment-Linked Option:

• This allows your income to be linked to investment performance, offering potential for growth. However, you would be taking more risk than a traditional annuity.

Flexi-Access Drawdown

This option allows you to take up to 25% of your pension pot as a tax-free lump sum (up to a lifetime limit of £268,275 unless you have protection), and the remaining 75% is moved into a flexi-access drawdown account/sub-pension, where it remains invested. Depending on the options of the pension provider, you can withdraw an income and/or a lump sum. 

Once an income or lump sum is taken from the drawdown account/sub-pension, you will trigger the Money Purchase Annual Allowance (MPAA), and your annual pension allowance will decrease to £10,000 per annum. 

Capped Drawdown

This option is a legacy pension income option that was available before 6th April 2015. While it’s no longer open to new investors, those who already have a capped drawdown arrangement can continue using it under the specific rules. 

Again, you can take up to 25% of your pension pot as a tax-free lump sum (up to a lifetime limit of £268,275 unless you have protection), and the remaining 75% is moved into a drawdown account/sub-pension. However, the income/lump sum is capped at a maximum level set by the Government Actuary’s Department (GAD) - typically 150% of an equivalent annuity. 

The benefit of capped drawdown is that if your income/lump sum remains within the maximum level, then you won’t trigger the Money Purchase Annual Allowance (MPAA). But, if the income/lump sum exceeds the maximum level, then your pension is automatically converted to flexi-access drawdown and the flexi-access drawdown principles apply. 

Lump Sum Withdrawals (UFPLS)

This will allow you to take lump sums directly from your pension pot. The first 25% is tax-free and the remaining 75% will be taxed at your marginal rate of income tax. 

Small Pot Lump Sum

If your pension pot is worth £10,000 or less, then you can take the entire of your pension pot as a lump sum. The first 25% is tax-free and the remaining 75% will be taxed at your marginal rate.

This option doesn’t trigger the Money Purchase Annual Allowance (MPAA), so you can continue to contribute up to the annual pension allowance. 

Conclusion

Choosing the right retirement option, or a combination of options depends on your lifestyle goals, risk tolerance, and your financial situation. Many people benefit from a blended approach, combining guaranteed income with flexible access. 

Speaking with a financial adviser can help you make informed decisions and build a retirement plan that works for you. This article does not constitute financial advice, and we recommend you speak to your financial adviser before taking any retirement options. 

Although every effort has been made to ensure that the information provided in this article is accurate and correct, the information provided does not constitute any form of financial advice. We recommend that you take financial advice before making any financial decisions.