Choosing income options
You have more choice and flexibility in how you set up your retirement income than ever before. So there are more things to consider – tax rules, legislation, the decisions you make now, all of these will affect the options available to you in the future.
Approaching retirement?
If you’re planning to retire in the next few years, you may want to start thinking about what you’re going to do with the pension pot you’ve built up. There’s a great deal of flexibility about how you take an income from your savings. That means it’s a good idea to check out the pros and cons of the various options, and see how they will each affect your lifestyle, the tax you pay and the amount you can pass on to your family.
Use the links below to read more about the main ways you can take money out of a defined contribution pension, also known as a money purchase pension. Please note that not all defined contribution schemes offer all options. If this is the case, you will be able to transfer your benefits to another pension scheme to access other options. With a defined benefits or final salary scheme, your options are likely to be different.
It is usually possible to take money out of your pension after you turn 55; this is due to rise to 57 on 6 April 2028, and you will normally be able to take 25% of your pot as tax-free cash.
It’s worth bearing in mind that you don’t have to choose just one of these options. You can combine two or more options if that is better for you – for example, you might want to buy an annuity with part of your pot and take lump sum withdrawals from the rest. If you have more than one pension pot, you can choose a different option for each of them.
| Flexible income (drawdown) |
Lump sums | Guaranteed income for life (annuity) | Leave it where it is |
|---|---|---|---|
| You can leave your money in your pension and take a regular income from it. | You can leave your money in your pension and withdraw ad hoc lump sums, as and when you need them. | You can use your money to buy an annuity from an insurance company, to provide you with a regular, lifelong income. | You can delay taking money from your pension until the time is right for you. |
| See how flexible income works | Find out about taking lump sums | Explore annuities | Read all about leaving your money where it is |
Choosing a pension product is like any other major buying decision – it’s important to shop around so you can compare charges and make sure you find an option that is right for you. You’ll find more information on the Pension Wise website.
| Flexible income (drawdown) |
Lump sums | Guaranteed income for life (annuity) | Leave it where it is |
|---|---|---|---|
| You can usually take up to 25% (up to the value of your available Lump Sum Allowance) of your pot as tax-free cash, either before your regular income starts or as part of each income payment. | You can usually take up to 25% (up to the value of your available Lump Sum Allowance) of your pot as tax-free cash, either before any other withdrawals or as part of each payment. | You can usually take up to 25% (up to the value of your available Lump Sum Allowance) of your pot as a tax-free cash lump sum before you buy your annuity. | If you've decided to delay taking money from your pension savings, they remain invested until you wish to access them. You'd still usually be able to take up to 25% (up to the value of your available Lump Sum Allowance) as a tax-free cash lump sum when you're ready. |
| Flexible income (drawdown) |
Lump sums | Guaranteed income for life (annuity) | Leave it where it is |
|---|---|---|---|
| Withdrawals above your 25% tax-free limit are taxed as income. | Withdrawals above your 25% tax-free limit are taxed as income. | The regular payments from your annuity are taxed as income. | Money that is left in your pension can grow free of tax. |
Use our Pension Tax Calculator to see how much tax you might have to pay.
| Flexible income (drawdown) |
Lump sums | Guaranteed income for life (annuity) | Leave it where it is |
|---|---|---|---|
| You will be able to adjust the income you receive as your circumstances change. | A single large withdrawal could move you into a different tax bracket, which would mean you will pay more tax. | Your income will be based on your age, the state of your health and the amount you use to buy the annuity. | Delaying withdrawals from your pension pot may mean you can take a higher income in the future. |
| The part of your pension pot you haven’t taken as income will stay invested and could grow, but it could also go down in value | Any pension savings you haven’t withdrawn will stay invested and could grow, but they could also go down in value. | You can choose an annuity that offers inflation protection, a guaranteed minimum payment or a spouse’s pension. | Your pension pot could grow, but it could also go down in value. |
| See how flexible income works | Find out about taking lump sums | Explore annuities | Read all about leaving your money where it is |
| Flexible income (drawdown) |
Lump sums | Guaranteed income for life (annuity) | Leave it where it is |
|---|---|---|---|
| If the income you take is too high, you may not have enough left to live on in retirement. | If you withdraw too much, you may not have enough left to live on in retirement. | Your annuity guarantees to pay you an income for the rest of your life. | If your pension investments perform poorly, you may have less than you hoped for when you decide to take an income. |
| Flexible income (drawdown) |
Lump sums | Guaranteed income for life (annuity) | Leave it where it is |
|---|---|---|---|
| You can leave any pension savings you don’t take as income to your family, beneficiaries or charities. If you die after age 75, your beneficiaries have to pay income tax on the benefits. | You can leave any pension savings you don’t withdraw to your family, beneficiaries or charities. If you die after age 75, your beneficiaries have to pay income tax on the benefits. | Depending on the type of annuity you choose, there could be a pay-out or a spouse’s income after your death. If you die after you’re 75, your beneficiaries have to pay income tax on the benefits. | You can leave any money that is still in your pension to your family, beneficiaries or charities. If you die after age 75, your beneficiaries have to pay income tax on the benefits. |
Some points to bear in mind
Tool
Calculate tax on withdrawals
Understand how much tax you might have to pay on the money you take from your pension and how it could affect your future retirement income.
Calculator
Flexible income calculator
This tool helps you understand how much flexible retirement income (income drawdown) you could take and how long your pension might last if you do so.
Need some help?
Workplace Investing Service Centre
If you’re unsure about any of your retirement income options and would like to find out more about your Fidelity pension, call our Workplace Investing Service Centre.
Pension Wise
The government’s Pension Wise service offers free, impartial guidance to help you understand your options at retirement. You can access the guidance online at moneyhelper.org.uk or over the phone.