Why is this important?
Pensions - income withdrawal
This information applies to England, Wales, Scotland and Northern Ireland
- About pensions income withdrawal
- How income withdrawal works
- When is income withdrawal a good option
- What happens to your pension fund when you die
- Other ways of taking your pension
- Further help and information
About pensions income withdrawal
This information is for people who have a personal, stakeholder or workplace money purchase pension.
If you have one of these type of pensions, you'll have a choice to make about how to get an income from your pension when you retire.
The most straightforward way to get an income is to use the money in your pension fund to buy a lifetime annuity. This is where you swap the money from your pension fund to give you an income in retirement. A lifetime annuity will pay you an income until you die.
However, it is also possible to leave some of your pension fund invested and take only part of it as income. You can either:
- draw money from the pension fund itself to give you an income. This is called income withdrawal, or
- use some of the money from the pension fund to buy a series of short-term annuities to give you an income.
This page tells you basic information about income withdrawal, including:
- what income withdrawal is and how it works
- who income withdrawal is suitable for
- other options for taking your pension
- where you can get more information about pensions and retirement.
For more information about personal and stakeholder pensions, see Personal pensions.
For more information about workplace money purchase pensions, see Workplace pensions.
For more information about annuities, see Choosing an annuity.
How income withdrawal works
Income withdrawal is a way of getting pension income when you retire while allowing your pension fund to keep on growing. Instead of using all the money in your pension fund to buy an annuity, you leave your money invested and take a regular income direct from the fund.
If your investments do well, your pension fund can carry on growing which means your retirement income will increase too. But remember, the value of your income could also go down if your investments do badly.
How much can you get from your pension fund
There is a limit on how much money you can take out of your pension fund each year, which is set by HM Revenue and Customs. This is to help stop your pension fund from running out of money during your retirement.
The money in your pension fund needs to carry on growing to replace what you are taking out. So you'll need your fund to be wisely invested to make sure you don't lose out. Make sure you get independent financial advice from a professional to help you make good decisions about using your pension fund and how it's invested.
For more information about where to get advice about your pension, see Getting financial advice.
You can get more information about withdrawing income from your pension fund from the Money Advice Service website at: www.moneyadviceservice.org.uk.
What income withdrawal costs
Income withdrawal can be an expensive option. There will be ongoing charges for managing your investments. Rules set by HM Revenue and Customs mean that the amount of income you take out of your pension fund has to be reviewed regularly. There are charges for this as well.
Make sure you are aware of how much income withdrawal will cost you when you are deciding on this option. You will have to make sure that the investments grow enough to cover the extra costs.
When is income withdrawal a good option
Income withdrawal can be useful if you're not ready to take all of your pension straightaway, for example where you're planning to carry on working part-time.
However, income withdrawal is really only suitable if you're happy to leave your pension fund invested in the stock market so that it has a reasonable chance of growing. This makes income withdrawal a high risk choice because the stock market can go up or down. You could end up with far less income than you've planned for.
For this reason, you'll probably only want to consider income withdrawal if you have a large (six figure) pension fund or you'll have enough other regular income during your retirement. For example, you might have income from other savings or investments.
If you have a workplace money purchase pension and want to take the income withdrawal option, some providers might insist you change your pension to a personal pension. You may need to take financial advice to see if this is a good option for you.
For most people, buying a lifetime annuity will be a better choice.
For more information about workplace money purchase pensions, see Workplace pensions.
For more information about annuities, see Choosing an annuity.
For more information about finding an indepenedent financial adviser, see Getting financial advice.
What happens to your pension fund when you die
If you die before the age of 75, the money left in your pension fund can be used to give your partner or dependents an income. Or it can be left as a lump sum (after tax) to whoever you choose.
If you die after the age of 75, the money left in your pension fund can either be used to give your partner or dependents an income or donated tax-free to charity. But if someone inherits the money after you're 75, they'll have to pay very high rates of tax on it.
An independent financial adviser can help you decide what's the best way for you to provide for family and friends after you die.
For more information about where to get advice about your pension options, see Getting financial advice.
Other ways of taking your pension
The usual way to draw a personal, stakeholder or workplace money purchase pension is to use the money in your fund to buy an annuity. This gives you an income for your retirement. There are different types of annuity, for example, ones which let you provide for a partner when you die. So it's always a good idea to get as much information as you can and shop around before choosing one.
Choosing the best way to use your pension fund is complicated. Before you finally decide on income withdrawal or on what annuity to buy, you should get independent financial advice from a professional adviser so that you make the best choice for your situation.
For more information about where to get independent financial advice, see Getting financial advice.
Further help and information
On Adviceguide
For more information about where to get financial advice, see Getting financial advice.
For more information about annuities, what to do when you near retirement and different types of pensions, see Pensions.
You may also find the following Adviceguide information helpful:
The Money Advice Service
The Money Advice Service is a free, independent service. Their website has lots of useful information about pensions including comparison tables for choosing a personal pension provider and a pension calculator for working out how much pension you'll need. There's also a range of leaflets to help answer your pensions and retirement questions.
Go to: www.moneyadviceservice.org.uk.
The Pensions Advisory Service
Helpline: 0845 6012923 local rate
Website: www.pensionsadvisoryservice.org.uk
The Pensions Advisory Service is an independent organisation that provides free information, advice and guidance about all types of pensions including state retirement pension, company, personal and stakeholder schemes.
TPAS doesn't provide financial or investment advice or recommend products.