what happens when you retire?

Introduction

Making the right choices when you’re saving for the future is important. But you also need to think about what happens when you come to retirement as the funds you have built up need to be converted into an income to live on. This section is aimed mainly at people who have saved through a personal type pension.

Taking your pension

All schemes are allowed to pay a tax-free lump sum^* of up to 25% of the value of your benefits – with a maximum of 25% of the Lifetime Allowance. However, not all schemes allow this so you need to check your scheme rules. Tax free lump sums are not available once you reach 75.

If you do take a lump sum the rest of your fund is used to provide a pension which can be done in several ways. But if you belong to an occupational pension^* scheme remember to check what the rules of your particular scheme are with the pensions administrator as these can vary from scheme to scheme.

The main ways of taking your pension are:

• getting a pension paid from the assets of your occupational scheme if you belong to one (see occupational schemes)
• you can buy an annuity^* (see annuities) if you belong to a money purchase type scheme. If you belong to an occupational money purchase scheme^* (see occupational pension schemes, ) your scheme might normally arrange buying the annuity for you. But it must give you a choice to shop around if you want. If you have a personal pension^* (see personal pensions) you’ll have to arrange the purchase of the annuity yourself. 
• you can draw an income directly from your pension fund as an ‘unsecured pension’ before you’re 75 (see income withdrawal)
• once you reach 75 you must either purchase a lifetime annuity^* (see annuities) if you haven’t yet done so or choose a restricted form of income withdrawal through what’s known as an alternatively secured pension (see income withdrawal)

Working and drawing your work pension

If you belong to an occupational pension scheme, you don’t have to retire to draw your pension. You may be able to draw some or all of your pension while carrying on working but it depends on your scheme’s rules.

Pension ages 

The minimum age at which you can take your occupational or personal pension is increasing from 50 to 55 by April 2010. There may be certain circumstances where you can take your pension before 55 for example due to ill health. But you would need to check with your pension administrator to see what your scheme allows.

Small pension funds

Special rules apply if you have a small pension fund. In this case, a small fund is defined as small if all your pension funds including those pension already in payment are valued at less than £15,000. If that is the case then you can convert them all into cash. You can get one quarter tax free but the rest is taxed as income. You can do this between the ages of 60 and 75. If you do want to convert them to cash you must do it within a 12 month period.

Contracted out of the additional state pension^*

If you are or have been at some time contracted out of the additional state pension (either from SERPS^* or S2P^* - see Contracting out^*) through an occupational money purchase pension or a personal type pension such as stakeholder pension, personal pension or group personal pension^* (see Personal pensions) then the following changes to pension rules apply:

• the part of your pension fund that is or was contracted out is called ‘protected rights. Since April 2006, you can convert up to 25% of your protected rights^* fund into a tax free lump sum;
• you can also take your protected rights at the same time as your occupational or personal pension if you are over 50 – this is increasing to 55 by 2010;
• since December 2005, you have to buy a pension for your partner if you are in a civil partnership (a registered same sex partnership)