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Consumer > How a pension works > Options at retirement
Options at retirement
There are a number of options available to you when you come to take your retirement benefits. The main purpose of most pensions is to provide a regular income for life on retirement, however, a proportion of the pension fund can usually be used to provide a tax-free lump sum (known as a pension commencement lump sum).
You will normally be able to take up to a quarter of the value of your pension as a tax-free lump sum. Taking a tax-free lump sum will reduce the regular income you can get from your pension.
There are a number of ways in which a pension can be used to provide a regular income, but the most common way is for the accumulated pension fund, less any tax-free lump sum taken, to be used to purchase an annuity from either the existing pension provider or another insurance company.
An annuity will provide you with a regular income for the rest of your life. As the existing provider may not offer the best rates, it is advisable to 'shop around' to see if another company will offer a higher income. This is known as the open market option.
There are a wide variety of different types of annuity available, including those that increase over time or which will continue to be paid to a husband, wife, civil partner or dependant on death of the annuitant (the person that purchased the annuity). It is not possible to cash in an annuity at any time.
As an alternative to purchasing an annuity it is also possible to receive an income directly from some pension plans, your financial adviser will be able to provide information about this option.
Depending on the type of pension, it is normally possible to take pension benefits from age 50, although this is due to increase to age 55 from 6 April 2010.
Lifetime Allowance
The Government has introduced a new limit on the maximum pension benefits value that can be used to provide benefits without being subject to a tax charge. This is known as the Standard Lifetime Allowance and relates to the total value of all your pension savings. Any tax charges will apply to the amount above the Standard Lifetime Allowance.
The table below shows the Standard Lifetime Allowance for the next three tax years.
| Tax Year | Standard Lifetime Allowance |
|---|---|
| 2008/2009 | £1.65 million |
| 2009/2010 | £1.75 million |
| 2010/2011 | £1.80 million |
Up until 5 April 2009, it is possible to protect the value of any pension savings you had built up by 5 April 2006 from the tax charges. Your financial adviser will be able to provide you with more information about whether you need to protect any existing pension savings.
References to taxation are based on our understanding of current taxation law and practice and may be affected by changes in legislation or by an individual's particular circumstances.
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