When you retire, there are a lot of decisions to be made. Not least, how you’ll access your pension and create an income that will last for the rest of your life. The introduction of Pension Freedoms five years ago means retirees today have far more options they need to weigh up.

For those with a Defined Contribution (DC) pension, where the value at retirement is dependent on contributions and investment performance, the Pension Freedoms have been welcomed. It means modern pensioners have far more freedom to create an income stream that matches their lifestyle and goals. The price of this is more responsibility. You need to ensure your pension lasts for the rest of your life, and the decisions you make at the point of retirement can have a long-lasting impact.

When you first access your DC pension, which is usually possible from the age of 55, you have four broad options to choose between. All have their pros and cons that should be carefully considered.

First, it’s important to note that you don’t have to access your pension at retirement. If you have other sources of income or assets you’d prefer to use, you can leave it untouched, allowing it to remain invested. You can access it further into retirement or leave it as an inheritance for loved ones, which may have some tax benefits if your estate could be liable for Inheritance Tax (IHT). If you have concerns or questions about IHT, please get in touch.

So, what are your four main options when accessing a DC pension?

1. Purchase an Annuity

An Annuity is a product that you purchase with your pension savings. It will then provide a regular income for the rest of your life. In some cases, this income can be linked to inflation, to maintain spending power, and can include a spouse, so your partner would continue to receive an income if you passed away.

This used to be the most common way people accessed their pension. It provides security and reliability during retirement. However, as retirement lifestyles have changed, some find that the same level of income doesn’t suit their needs. For example, if you intend to work part-time during early retirement or to spend on once in a lifetime experiences in the first years, an Annuity may not be right for you.

When may an Annuity be right for you? If a reliable income stream is important to you or if you have other assets or pensions that can be used to provide flexibility.

2. Take a flexible income

Flexi-Access Drawdown provides a solution for those that want more flexibility with how and when they access their pension. Pension savings remain invested and retirees can increase, decrease or pause withdrawals as and when it suits them. For those with changing income needs or wanting more control, this can be appealing.

However, the main drawback here is that you need to be aware of how sustainable withdrawals are. You won’t have a guaranteed income, so you need to consider life expectancy. As savings remain invested, performance will also have an impact. As a result, it’s important retirees using Flexi-Access Drawdown are comfortable with investing, reviewing performance and making decisions based on the information.

When may Flexi-Access Drawdown be right for you? If your necessary income is expected to fluctuate in retirement or you have an existing reliable income, such as from a Defined Benefit pension.

3. Take cash in lump sums

You can take lump sums from your pension as and when you need to. You can usually take a 25% tax-free lump sum, with the remaining being liable for tax at your highest tax rate.

There are two things to keep in mind here. The first is, that beyond the tax-free lump sum, it’s an option that won’t be tax-efficient for many. The second is that making lump sum withdrawals can have a long-term impact on retirement income.

When may taking cash in chunks be right for you? When you don’t need a steady income but would like to access your pension as and when it suits you.

4. Take your whole pot

Should you choose to, you can access your entire pension pot in one go. Usually, 25% will be tax-free, but the remainder may be liable for tax at your highest tax rate, which may be as high as 45%. As a result, for many people, withdrawing their whole pension isn’t in their best interests. Spreading withdrawals over several years can lower your tax bill.

In addition, you should consider the long-term implications of drawing down a pension and what you intend to do with the money. If you’re hoping to invest, for example, investing through a pension may be more appropriate. However, there are times when accessing a whole pension pot can be useful but it’s important to fully understand the consequences.

When may withdrawing your whole pension be right for you? If you have a small pension you’d like to use in one go and have other pensions that will provide an income.

Building a retirement income that suits you

You don’t have to choose one of the above options exclusively. You can mix the different ways of accessing your pension to build an income that suits your lifestyle goals. For example, you may choose to purchase an Annuity with a portion of your pension, providing financial stability. The remainder could stay invested for you to take an adjustable income to match changing income needs.

Retirement is a time when you have to make many decisions, but we’re here to help with the financial ones and put you on the right track for the retirement you’ve been looking forward to. Knowing your pension decisions are aligned with goals can provide peace of mind to really enjoy the milestone. Please contact us today to discuss your pension options.