There was a time when retiring meant a carriage clock on your final Friday of work and a replacement income, in the form of an annuity, the following Monday.

The traditional pension for life, whether from a final salary or a defined contribution scheme, makes budgeting simple. It can, though, be inflexible. This is one of the reasons why Pension Freedoms legislation was introduced back in 2015.

A raft of new “flexible” options were introduced but, despite these changes being in force for almost a decade, retirees may not have a firm grip on their new options yet.

Figures recently reported by PensionsAge suggest that more than half (56%) of UK pension holders aged 55 to 64 have “little or no awareness” of their retirement options. More than a third, meanwhile, have yet to start planning for retirement.

You’ll likely have a long-term plan in place already thanks to your relationship with us. But understanding your options – and the role each plays in your overall plan – is vital as your big day approaches.

Keep reading for everything you need to know about your retirement options.

3 pension options to weigh against your retirement plans

Firstly, it’s important to note that there’s no “one-size-fits-all” approach and the option, or options, you choose will be individual to you.

Your spending in retirement is unlikely to be regular so the “right” choice for you will be the one that aligns with your plans, at each stage of your retirement journey.

Let’s begin with your flexible choices.

1. An uncrystallised fund pension lump sum

Arriving as part of the government’s Pension Freedoms legislation, an uncrystallised pension fund lump sum (UFPLS) means taking your pension pot as a one-off lump sum, or as a series of lump sums.

Each payment will be made up of 25% tax-free cash, with 75% taxed as income.

In the early, active years of your retirement, you might have far-flung adventures planned and big-ticket items to purchase. A lump sum is a great way to provide the capital to fund these, whether you plan to travel or fulfil another life-long ambition.

As with the other flexible options available, the responsibility for budgeting with your lump sum amount falls to you so you’ll need to keep track of your expenditure. Remember that your hard-earned pension pot is designed to provide you with income for the rest of your life so you’ll need to factor longevity and your future plans into the lump sums you take.

Generally, an UFPLS might be best used for one-off luxuries or projects like a house renovation, but you’ll still have regular day-to-day expenses to cover.

2. Flexi-access drawdown

Another option introduced as part of Pension Freedoms, flexi-access drawdown provides you with an income via flexible withdrawals.

You decide when, and how much you draw down, meaning that the income you receive can be matched to your fluctuating needs.

Your tax-free cash entitlement remains at 25%, which you can opt to take in full at the outset or as a tax-free portion of each withdrawal you make. The remainder will be taxed as income at the highest rate you pay.

The pension fund that you haven’t yet drawn down remains invested and so has the chance of continued investment growth.

As with an UFPLS, the onus for careful budgeting is on you. This could mean keeping track not only of your withdrawals but of external factors like inflation and stock market movements.

High inflation and market downturns can deplete your fund more quickly so be sure to get in touch if you’re worried about how to manage pension decumulation.

3. An annuity for life

While flexible options are great for covering irregular outgoings and one-off luxuries, they can make budgeting difficult, and you’ll still have regular outgoings to cover.

A traditional annuity can be perfect for paying known expenses like household bills or a mortgage. Once it is in payment, it will continue to pay for life, and might even continue to pay to your partner after your death.

Having taken a hit back in 2015, the popularity of annuities is rising again and rates have now returned to pre-Pension Freedoms levels. This makes now a great time to consider whether an annuity should be part of your plan.

Your individual retirement plan requires a solution unique to you

Remember that you don’t have to stick to just one option. You might use an annuity to cover known expenses and flexible options to cover one-off luxuries during the earlier stage of your retirement.

It’s worth remembering too that your expenditure could increase again in later life if care is needed so budget for the whole of your retirement.

Expert Wealth’s team of experienced and professional advisers can help here so be sure to speak to us.

Get in touch

With decades of experience, our Chartered Financial Planners have the expertise to help you plan your retirement your way. If you have any questions, please get in touch and speak to us today.

Please note

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.