What happens when you retire?

When can you retire?

Whilst the UK state pension age is currently 65 for men and 63 for women, if you have an individual or workplace pension, you can retire and start receiving an income from the age of 55.

Pension commencement lump sum (PCLS)

When you retire, you are entitled to take up to 25% of your pension pot as a lump sum of tax-free cash. This is optional, and if you do take your PCLS, you do not have to take the full 25%.

For the remaining money, there are 3 options:

  • You could buy an annuity
  • You could take income drawdown
  • Uncrystallised funds pension lump sums (UFPLS)
Pile of cash

Buy an annuity

An annuity provides you with a guaranteed income for the rest of your life. The income you receive is subject to income tax.

There are many different types of annuity, and so the income you receive depends on a number of factors such as how much money is in your pension pot, your age, your health, whether you want the income to increase each year, and whether you want the annuity to pay out to someone after you die.

Take income drawdown

With drawdown, you can take money out of your pension pot each year as income. This is subject to income tax. Your money stays invested and so your pot may continue to increase in value, giving you higher returns. Your pot may however fall in value. The income is therefore not guaranteed, and if you take too much out to begin with, you may run out of money before you die.

All income drawdown arrangements set up after April 2015 come under the term “flexi-access drawdown”.

If you die under the age of 75, any remaining money in your pension pot can be inherited tax-free. If you die over the age of 75, inheritors must pay taxes on the money they receive.

Uncrystallised funds pension lump sums (UFPLS)

UFPLS is very similar to flexi-access drawdown in that you can take out any amount of money, whenever you want. The main difference is that with UFPLS, your money is not actively invested, and so the chance for your pension pot to grow is very limited. It is good if you want the flexibility of income drawdown, but without the risk of investments falling in value. Income tax is paid on money taken out, except for the 25% PCLS.


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