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Explore your alternatives

You can mix and match any of the options below to fit with your particular retirement needs. What you decide now will affect your retirement income for the rest of your life. So take your time to understand your options, and get help and advice if you need it.

There’s a lot to consider when working out which option or combination best suits your financial requirements. You should select what will provide you with a dependable and tax-efficient income throughout your retirement.

Cashing in

Providing you have reached the age of 55, you can take the entire value of your pension pot as a cash sum to spend as you choose. The ability to do this can sound like a desirable option. But it is one that needs careful thought.

The complete independence of this option can be both part of its appeal and its risk. You need to ask yourself what your expectations are in retirement and if cashing in your money will provide you with enough income for your needs.
 

Things to think about

 
  • You could run out of money – think carefully about what you intend to spend your money on and factor in necessities as well as leisure
  • You could end up paying more tax than expected – use the pension tax calculator to find out the tax implications for you
  • There’s no guaranteed income for life – take into consideration your health and lifestyle, as these will affect your life expectancy and how long you require your money to last

 

Investment-linked annuity

An investment-linked annuity is a type of lifetime annuity where your income can vary in line with changes in the value of your investments such as stocks and shares. 

How does it work?

Things to think about

You can choose to take up to 25% of your pension pot as tax-free cash. You then use the remaining amount to buy an investment-linked annuity.

Investment-linked annuities carry a risk. You can benefit from stock market growth, but there’s also a risk that your fund value could fall. 

If you’re considering this option, make sure you could afford to see your retirement income go down. However, all investment-linked annuities do guarantee a minimum income; the lowest level to which your income could fall in times of poor stock market performance.

  • An investment-linked annuity is an investment. As with any investment, the value of your fund can go up or down and may be worth less than what you paid in
  • You should ensure that if your income drops to the guaranteed minimum income amount that you would still have sufficient income to live on
  • The income received is added to any other income you may receive and is taxed accordingly
  • Once you start an investment its structure cannot often be changed and you do not know the level of income it will provide in the future
  • As with a conventional lifetime annuity you cannot change this option

 

Pension drawdown

When you decide to take your pension you can reinvest your pot into one or more drawdown funds; designed to provide you with a regular income in retirement. The income you receive is totally dependent on the investment fund’s performance,  therefore it may vary and isn’t guaranteed for life.

How does it work?

Things to think about

You can choose to take up to 25% of your pension pot as tax-free cash. You then move the rest into income drawdown, or you can move your pension pot gradually into the fund(s).

The choice of investment funds and flexibility may vary from one provider to another; you can choose funds to invest in that match your attitude to risk and set the income you want. 

At any time you can use all or part of the funds in your income drawdown to buy an annuity or any other retirement option that may offer more certainty in terms of growth and income.

When you pass away, anything that’s left in your fund can be left to your dependants. Depending on when you pass away and how your dependants take the benefits there may be a tax charge.

  • Income withdrawn is added to any other income you may receive and is taxed accordingly 
  • You need to carefully plan how much income you can afford to take, otherwise there’s a risk you’ll run out of money. This could happen if:
    • you take too much out in the early years
    • your investments don’t perform as well as you planned and you don’t adjust the amount you take accordingly
    • you live longer than expected
  • It’s important to regularly review your investments. Unless you’re an experienced investor, you may need a financial adviser to help with this
  • Comparing products yourself can be difficult, so it’s best to get financial advice when choosing funds
  • Pension drawdown is an investment. As with any investment, the value of your fund can go up or down and may be worth less than what you paid in
  • Inflation over time can reduce the buying power of any income you are receiving. To offset the effects of inflation you can take an increasing income from your drawdown plan, but funds may be eventually exhausted

Did you know?

An annuity is the only option to guarantee you an income for life...

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