About your pension
Managing your pension
Managing your pension
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Overview
Flexible retirement income
It’s hard to know what you’ll be doing in the future, so picking a retirement income to last a decade or two (and hopefully even longer) isn’t easy. Flexible retirement income (pension drawdown) lets you take whatever income you want – and change it when you need to.
Keeping your income sustainable
People are living longer and choosing to spend their retirement in many different ways. So if you’re thinking about flexible income, consider the factors that will affect how long your pension lasts:
- The amount you have in your pension and other investments at retirement.
- The amount you take out of your pension.
- The way you invest your money.
- You can aim to provide an income, to grow the capital in your pension, or for a combination of the two.
One of the big decisions about flexible income is how you produce it.
| The facts | Advantages | Disadvantages |
|---|---|---|
| You can take up to 25% as a tax-free lump sum up to the standard lump sum allowance of £268,275. | You can take it at any point from age 55. | Any cash you take reduces the amount of income you could receive. |
| The rest of your money stays invested, and you can take withdrawals at any time. | Flexibility of taking money when you need it and making further contributions if you wish. | All income is taxed the same as any earnings you have. You should ensure you understand what tax rates might apply to you. |
| You need to consider how long you will need an income for, as you could live 20 years or more in retirement. | If you invest your money carefully and regularly review how any income is reducing your pension pot, you can ensure that your money lasts as long as possible. | You could run out of money if you take too much income from your pension pot. |
| You need to decide which funds your pension pot is invested in as the performance of any funds will affect how long any income will last. | You can choose where to invest your pension to meet your needs. | Your pension pot could go down dramatically if you don’t regularly monitor how your funds are performing. |
Three options for producing flexible retirement in
Natural income only
You can take the dividends paid to the fund, instead of cashing in units or shares. There’s more chance of your money lasting, but you won’t know exactly how much you’ll get from month to month.
Capital withdrawals only
You can put your money into investments that aim to deliver capital growth, instead of income, then withdraw the growth amount as income.
Capital withdrawals plus natural income
You can make withdrawals that include the natural income from your investments plus some of your pension pot to get the income you need.
Whichever method you use to take an income, it’s important you plan carefully so you don’t run out of money. You need to think about the different types of fund choices that will support the way you draw down your pension.
Changing your flexible retirement income arrangements
The advantage of flexible retirement income is that you can manage your money as your needs change over time. You can change the funds you’ve invested in, how much and how often you choose to withdraw, and even change your provider.
Budget for retirement
Use the budgeting tool to input your known expenditure and compare it against your expected retirement income to see how much you can afford over and above everyday spending.
Estimate your flexible income
Understand what amount of income you could get from drawing down your pension using flexible income and get an estimate of how long you can expect that income to last.
Pension Wise
Pension Wise is a service that offers free, impartial guidance to help you understand your options at retirement. Call them on 0800 138 3944 or visit them online by clicking the link below: