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Pension options for retirement: What to do with your pension pot

The earlier you start thinking about your retirement, retirement planning and what pension options are open to you, the better. You’ve come to the right place if you’d like to know more about planning your retirement income. If you’re new to it, thinking about the choice of pensions might feel rather like stepping into a minefield. That’s why we’ve decided to publish this article.

❓ What are the 3 main types of pensions?• Defined contribution pension
• Defined benefit pension
• State pension
ℹ️️ What is a pension pot?The total amount of money you and/or your employer pay towards your retirement
💯️ Can I take all my pension pot in one lump sum?Yes, you can, but 25% will be tax-free, while the remaining 75% will be taxed
⚖️ Is deferring a pension an option?You can defer your pension and continue working after retirement age

The aim is to make you fully aware of the pension options you can choose and explain them in simple everyday language to empower you to make the right choice of pension according to your personal circumstances. Interested? If so, please read on.

Various types of pension schemes

Pension options fit into one of three categories – state pensions, workplace pensions, and private pensions. We will go into more detail shortly, but first – the state pension.

The UK state pension

All UK nationals who work and pay national insurance contributions are entitled to a government state pension. Once you reach pension age (see next paragraph), you will start receiving your pension in monthly instalments. However, there is no pension pot, only regular payments made every four weeks in arrears, directly into people’s bank accounts.

If you’re unsure when you will start receiving your state pension, you can check on the State Pension age timetables or use this government tool simply by entering your date of birth.

Workplace pensions

Since 2012, all employers in the UK have been gradually required to automatically enrol any eligible workers they have into workplace pension schemes. You will automatically be enrolled if:

  • You are 22 years of age or more
  • You haven’t yet reached the state pension age
  • You are paid more than £10,000 per annum
  • You work here in the UK

There are two types of workplace pensions – defined benefit and defined contribution. Neither affects your right to a state pension.

The main difference between these two types of workplace pensions is that a defined benefit scheme promises you a specific income, while the income you will get from a defined contribution scheme depends on things like how much has been paid into the scheme and how the funds investments have performed.

Defined benefit workplace pensions are now quite rare. But you could be entitled to a defined contribution income for the rest of your life after you retire if you work for local government or another organisation that participate in a flexible retirement LGPS (Local Government Pension Scheme) scheme.

Private pensions savings

A private pension is not a workplace pension. For most private pensions, only you contribute, not your employer. Private pensions are popular pension options for self-employed people and those who prefer to manage their investments themselves.

A SIPP is a type of private pension. The initials stand for “Self-Invested Personal Pension.” It is a DIY type pension whereby you decide how much you want to contribute and into which funds. It’s pretty hands-on and only suitable for those who have experience with investing money.

As you can see, the range of pensions can be a little bewildering, and you may need a pension guide or call on the services of pension specialist.

What is a pension pot?

When speaking of workplace pensions, the term “pension pot” relates to the total amount of money you and your employer (if you are employed) pay towards your retirement. If your pension scheme is the type set up to accumulate interest, your pension pot will also include any interest gained from the investments purchased for the fund by the contributions.

If you set up a private pension, which only you pay into, the pension pot is the total money accumulated from your contributions and any interest earned.

Your pension provider should provide you with an annual statement showing the current and projected value of your pension fund. In certain instances, some pension providers give you the option of checking online to find out how much your pension is worth via their websites.

Due to changes in the pension rules, accessing pension at 55 is now an option. But when taking money from your pension, you need to stop and think as it will affect your retirement income.

Retirement options and pension freedoms

Significant changes were made to pensions on the 6th of April 2015 when the government granted new pension freedoms. From the age of 55, you could access as much or as little of a defined contributions pension fund as you wish and take 25% of any of your pension pots tax-free.

Your pension pot options

With so many pension options around today, it’s best to seek guidance from a professional financial adviser about which type of scheme will give you the best pension options at retirement. Let’s take a look at some of the options open to you. They include:

  • Income Drawdown
  • Flexible Acess Drawdown
  • Capped Draw Down (no longer available; if already in place, you can continue to use it.)
  • Taking all your pension pot in one lump sum
  • Cash-out your pension early
  • Using your pension pot to buy an annuity

You could decide on a pension transfer if you’ve got more than one pension (excluding your state pension). Amalgamating your pensions makes it easier to manage and keep track. Here is more information on pension transfer.

If you research your pension options, you may come across UFPLS. It stands for “Uncrystallised Funds Pension Lump Sums.” It is industry jargon and relates to the lump sum you can take out without going into drawdown or buying an annuity.

Pension drawdown: UFPLS vs FAD

FAD (Flexi-Access Drawdown) and UFPLS are ways of withdrawing from your pension pot a little at a time. But one is more structured than the other.

UFPLS pension options

This option allows you to withdraw lump sums from your pension pot of any size, whenever you like, leaving the remainder of the investment to grow. 25% of each UFPLS payment can usually be taken tax-free.

Flexi-drawdown pension options

Following the new pension options at 55, the Flexi Access Drawdown Pension option (now the only flexible pension drawdown option available) allows you to withdraw 25% of your pension pot tax-free if you so desire, and structure the balance to be withdrawn as regular payments in monthly, quarterly or annual instalments. The regularity can be changed at a later date if required.

If at any time you wish to use the balance of your pension pot to purchase an annuity or transfer it to a different flexi-access pension drawdown provider, you may do so.

Taking all your pension pot in one lump sum

You should always consult with a financial adviser before taking out your whole pension. If you decide to withdraw your entire pension pot as cash, you’ll pay more tax than if you’d taken it over time.

Taking out your entire pension via UFPLS is the easiest way. However, the first 25% payment will not be taxed, while the remaining 75% will be taxed as income earned. So if you are a high earner, you can end up paying 40% – 50% tax on the 75%.

If you take out the whole pension, it may affect your tax benefits. This is because you’ll lose access to the annual allowance, meaning you won’t be able to put more than £4,000 away every year into other pensions.

Delaying retirement and deferring your pension

There is one other option open to you  – a deferred pension. You don’t have to take your pension until you are ready to. You might decide to continue working after retirement age while deferring your pensions and leaving them where they can continue to grow.

If you decide to continue working and make withdrawals from your pensions simultaneously, all of your income has to be totalled for income tax purposes.

Pensions guidance

Pension planning is one of the most challenging financial decisions you will face. Your pension savings will determine how comfortable the rest of your life is after you retire.

Do you intend to purchase an annuity to secure a regular income, spend a large lump sum of money on the holiday of a lifetime, do you want your investment to carry on growing, or would you prefer something of everything?

The pension options you face are myriad, so much so that it is advisable to seek professional help with making your personal pension plans.


What are your options with a pension?

You can delay your pension or retire later, choose an annuity or pension drawdown, or take lump sum payments or the whole pension in one swoop. But, of course, you can also have a mixture of pension options.

Which pension option is best?

There is no best pension option. Instead, pick the pension option that suits your retirement needs and future financial goals. When considering the different options for your pension, consider your current life expectancy, beneficiaries, and retirement lifestyle.

Can I withdraw from my State Pension when I retire?

You can only withdraw from your state pension when you reach the state pension age. So if you retire early, at age 55, you will not be able to touch your state pension.

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