The options you have as to how you take your pension depend on the type of pension scheme you belong to and the rules of your scheme.
On this page:
There are different options depending on whether you're a member of a:
Whether your scheme is an occupational scheme or a personal pension scheme may also affect what options you're offered.
Whichever type of scheme you're a member of you'll probably be given the option to take part of your pension pot as a tax free lump sum. Some schemes - particularly public sector schemes - will automatically give you a lump sum as well as a pension.
Your scheme administrator will be able to tell you what options are available to you. If you don't know who the scheme administrator is you can use the Pension Tracing Service to find their contact details.
If you have a small pension pot (£18,000 or less) you may be able to take your whole pension fund as a lump sum.
The amount of pension you'll get is based on the formula set out in your scheme rules. Often your pension will be based on your final salary and the number of years you've been in the scheme. Another common type of pension is career average where your pension is based on a percentage of the salary you got each year you were employed. Your pension may be paid directly from the scheme or by an insurance company chosen by the scheme administrator. You'll have no choice over this.
Your scheme may give you the option to give up part of your pension to provide a pension to any dependant, for example your spouse or civil partner, following your death.
The amount of pension you'll get depends on how much is in your pension pot and how much pension you can 'buy' with it. Money purchase or cash balance schemes can give you the following options when you come to take your pension:
More on these in the sections below.
Your pension scheme pays your pension pot to an insurance company to buy an annuity contract. They will pay your pension to you for the rest of your life.
You can buy the annuity contract from an insurer chosen by your pension administrator or you can choose another insurance company on the open market. Some older pension schemes have agreed annuity rates with their chosen annuity provider.
Buying an annuity on the open market gives you the opportunity to shop around so you can use your pension pot to choose the pension (annuity) that suits your needs. Pensions can vary widely in price so it's best to look at a price comparison website or the money section of a newspaper to make sure you get the best deal for you.
Your scheme must give you the option to buy your annuity on the open market.
The amount of pension your annuity will pay depends on a number of factors including:
There are several types of annuities on the market. Typical types are:
An annuity will only pay an income while you're alive - unless it's a joint life annuity. When you die the income will stop. You can choose to buy an annuity that guarantees to pay a pension for a minimum period of time (up to ten years), even if you die before then. If you die before the end of your guarantee period any remaining payments will be paid to your estate.
A drawdown pension allows you to take income from your pension pot while the pot remains invested. You can choose how much pension you want to be paid each year within certain limits. There are two forms of drawdown pension:
With a capped drawdown pension there's a maximum amount you can draw each year but no minimum amount. This annual limit is calculated by your scheme administrator based on the value of your pension pot and factors set by the Government Actuary's Department.
While you're under 75 your pension scheme must review the annual limit at least once every three years. Other events can trigger a review of the limit. When you reach age 75 the scheme administrator must review the annual limit every year.
If you take more than this limit in a year the excess will be subject to a tax charge as an unauthorised payment.
Because of these reviews pension payment amounts can go down as well as up. The changes in amount can be significant depending on the circumstances when the review was made.
To qualify for flexible drawdown you must already be getting a pension of at least £20,000 each year from 'secure pensions' such as the State Pension, most lifetime annuities and pensions paid from defined benefits schemes. With flexible drawdown there's no limit on the amount you can draw from your pension scheme in any year. You can: