What are my retirement options and why see a financial adviser?

Retirement planning is more flexible and complex than ever. Whether you're approaching retirement or just starting to think about it, understanding your pension options, and getting expert pension advice can help you make the most of your savings and secure your future.

Once you reach your desired retirement age and want to start accessing your pension, there are several ways to take your pension benefits. Each option has different levels of flexibility, risk, and tax implications.

Your choices

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. There are a few different annuities and these are as follows: 

1. Compulsory Purchase Annuities (CPAs) – These are bought using pension funds, which have been crystallised (where tax-free cash has already been taken). The income from the annuity will be taxed as earned income and subject to your marginal rate of income tax.
2. Purchased Life Annuities (PLAs) – These are bought with personal funds, such as savings or proceeds from investments. They can also be bought using tax-free cash from your pension. The income from the annuity is split into a capital element (return of the original investment) and an interest element, treated as savings income. This means that only part of the income is taxable, making a purchased life annuity (PLA) more tax-efficient than a compulsory purchase annuity (CPA).
3. Fixed Term Annuities (Short-Term Annuities) – These are bought using pension funds, which have been crystallised (where tax-free cash has already been taken). However, the income is purchased for a fixed period, avoiding the need to commit the whole pension pot permanently. The part of the pension that isn’t used to buy an annuity will remain invested or available for other uses. The income from the annuity will be taxed as earned income and subject to your marginal rate of income tax.

Before deciding which annuity to purchase, it is important to think about the available 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. An example of this is: 
A client uses £100,000 of their pension pot to buy an annuity. They choose 100% value protection.
They receive £5,000 per year from the annuity, but they die after 3 years having received £15,000 in total. With value protection, the beneficiaries would receive: £100,000 (initial pot) - £15,000 (already paid) = £85,000

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.

Uncrystallised Funds Pension Lump Sum (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. This can be partial or full lump sum withdrawals, but careful consideration needs to be given to the tax implications of it. 

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. 

Again, careful consideration needs to be given to the tax implications of it.

Mix and match approach

Many people combine the different options to suit their evolving needs, lifestyle, and risk tolerance throughout retirement. A financial adviser can help tailor the right mix for you to suit your circumstances. 

Why see a financial adviser?

Accessing your pension is one of the most important financial decisions you’ll make. It affects your income, tax position, investment strategy, and legacy planning for the rest of your life. A financial adviser can help you make the most of your pension savings and avoid costly mistakes.

1. A tailored retirement income strategy
A financial adviser will:

• Assess your income needs, life expectancy, and risk tolerance.
• Help you choose the right mix of options: drawdown, annuities, UFPLS, or lump sums.
• Create a sustainable withdrawal plan to avoid you running out of money, and/or leaving funds to your beneficiaries. 

2. Tax efficiency
Pension withdrawals are taxable, and poor planning can lead to unnecessary tax bills. An adviser can:

• Help you maximise your tax-free cash.
  Structure withdrawals to make sure you don’t enter higher tax bands. 
  Coordinate pension income with other sources like ISAs, dividends, or rental income.

3. Avoiding common pitfalls
Without advice, people often:

• Withdraw too much too soon, and don’t look at sustainability.
• Miss out on valuable guarantees or death benefits.
• Trigger the Money Purchase Annual Allowance (MPAA) unknowingly, limiting future pension contributions.

An adviser ensures you understand the rules, risks, and consequences of each decision.

4. Pension consolidation and investment advice
If you have multiple pension pots, an adviser can:

• Assess whether to consolidate them.
  Recommend suitable investment strategies for drawdown.
  Monitor and adjust your portfolio over time with an ongoing adviser service. 

5. Peace of mind
Perhaps most importantly, working with a financial adviser gives you:

• Confidence that your plan is robust.
• A trusted expert to guide you through changes in markets, legislation, or personal circumstances.
• More time to enjoy retirement, knowing your finances are in good hands.

If you wish to discuss the topics mentioned in this article in more detail and feel you would benefit from our pension advice, then please contact us today for a free initial meeting.

Disclaimer: This article does not constitute financial advice, and you should always seek advice from a regulated financial adviser before making any financial decisions. 

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.