If you’re saving into a defined contribution (DC) pension, you can choose how you access the money. You’ll also be responsible for ensuring the savings provide you with an income for the rest of your life, so understanding the different options available to you is crucial.

Most workers saving for retirement will have a DC pension. This is where your pension contributions, along with those made by your employer and tax relief, are added to a pot. This pot is then typically invested with the goal of delivering long-term growth.

Pensions are often invested through a fund that pools together your savings with that of others. You can usually choose from a selection of funds, but you won’t need to make day-to-day investment decisions.

When you retire, your pension will hold a sum of money that consists of contributions made throughout your working life and investment returns. But how do you turn this pot of money into an income? You usually have three main options, and each has its pros and cons.

1. Purchase an annuity

Annuities were once a common way to turn a pension pot into an income. However, they fell out of favour when the government introduced Pension Freedoms in 2015. Yet, rising annuity rates and uncertainty due to high levels of inflation mean they’re becoming more popular again.

An annuity is an insurance product that you buy, often with savings in your pension. It will then provide a reliable income for the rest of your life. As a result, it can be a useful way to create financial certainty, as you don’t run the risk of running out of money in your later years.

You can choose an annuity that rises in line with inflation to protect your spending power throughout retirement. You may also choose to purchase a joint annuity, which would continue to provide your partner with an income if you pass away.

How much you’d receive from an annuity will depend on the annuity rate. So, reviewing different options if you decide an annuity is right for you is essential.

Enhanced annuities offer a higher rate for individuals with particular medical conditions or lifestyles. Impaired life annuities could also offer a higher rate for people with lower-than-average life expectancy because they’re suffering from certain medical conditions, such as cancer or heart disease.

2. Use flexi-access drawdown

If you’d prefer to be in control of your income, flexi-access drawdown is an option.

Typically, money held in your pension will remain invested and you can adjust the income you receive from it. For example, you could increase or decrease your income to suit your needs. As your savings are often invested, they have the opportunity to continue to grow further. However, keep in mind you will be exposed to investment risk and returns cannot be guaranteed.

You’ll also need to be mindful of how long your savings will need to last. Taking too high an income at the start of retirement could mean you run out later. If you’re using flexi-access drawdown you should feel confident about the income you’re taking and its sustainability.

As a result, regular review when choose flexi-access drawdown are important, and cashflow forecasting, which could help you visualise how the decisions you make or financial shocks will affect your long-term wealth, could be useful.

3. Withdraw lump sums

Another flexible option is to take lump sums from your pension as and when you need to without any requirements to take a regular income. This could be useful if your pension is supplementing other sources of income.

As with flexi-access drawdown, what remains in your pension will usually be invested. You could also choose to take your entire pension in one lump sum.

However, you should keep in mind that pension withdrawals could be liable for Income Tax. So, you could face a large bill if you withdraw a significant lump sum. If you are eligible for means-tested benefits, withdrawing a significant amount for your pension could also affect the amount you’re entitled to.

You don’t have to pick a single option

You don’t just have to pick one option either, you can mix and match to create a plan that suits you.

So, you could choose to take a lump sum out of your pension when you first retire. This could help you pay for one-off costs, like updating your home, or experiences, such as travelling the world.

You may then use a portion of what’s left to purchase an annuity to provide a base income that covers your essential outgoings. The remainder you could access flexibly to supplement your income when you need it.

What’s important is that you consider your income needs throughout retirement and ensure you have a sustainable income to provide security in your later years. Arranging a meeting with a financial planner can be valuable and help you create a long-term plan that matches your goals.

How a financial planner could help you in retirement

It can be difficult to know which option is right for you. The decisions you make at the start of retirement could affect your financial security for the rest of your life, and tailored financial advice can give you peace of mind.

We’ll work with you to set out what you want to get out of retirement and how your pension could help you achieve this. As well as understanding how to access your DC pension, a financial planner could also help you:

• Set out your long-term goals
• Understand and minimise tax when taking income from your pension or other assets
• Assess how to use other assets, like investments or property, to support your retirement goals
• Have confidence that you could weather financial shocks
• Create a plan to pass on assets to loved ones during your lifetime or when you pass away.

If you’re nearing retirement and have questions or would like to discuss your options, please get in touch.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of investments and income from them can go down. You may not get back the original amount invested.

A pension is a long-term investment, the fund value may fluctuate and can go down. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.

Tax treatment is based on individual circumstances and may be subject to change in the future.