Your Pension Options at Retirement
Making the Right Decision for Your Retirement Income
Retirement is an exciting new chapter, but it comes with important financial decisions. Choosing how to take income from your pension can significantly impact your lifestyle, tax position, and long-term financial security. Some options cannot be reversed, so getting expert advice before making a decision is crucial.
Whether you prefer a guaranteed income, a flexible approach, or a combination of both, understanding the available options will help you make an informed choice.
Planning Your Retirement Income
Before deciding how to withdraw from your pension, consider these key questions:
- How much income will you need each year?
- What other income sources do you have, such as State Pension, savings, or rental income?
- How long will your retirement savings need to last?
- Do you want to leave an inheritance for your loved ones?
A cashflow planning report can provide a clear picture of your financial future, helping to ensure that you do not run out of money or pay unnecessary tax. Our independent financial advisers in Swindon and nationwide can help you create a personalised retirement income strategy.
Comparing Your Pension Income Options
There are three primary ways to take an income from your pension:
- Annuity (Guaranteed Income) – Provides financial security with a set income for life or a fixed term.
- Pension Drawdown (Flexible Income) – Offers greater control, allowing you to adjust withdrawals as needed.
- UFPLS (Uncrystallised Funds Pension Lump Sum) – Allows you to withdraw lump sums where each withdrawal is 25% tax-free and 75% taxable, instead of taking your tax-free cash upfront.
| Option | How It Works | Pros | Cons |
|---|---|---|---|
| Annuity (Guaranteed Income) | You exchange your pension pot for a guaranteed income, either for life or a set number of years. | Provides financial security with a steady income. No investment risk. Can include an income for your spouse. | Once set, it cannot be changed. Inflation-proofed annuities start with a lower income. Some options may not offer inheritance benefits. |
| Pension Drawdown (Flexible Income) | Your pension remains invested, and you withdraw funds as needed. | Full control over withdrawals. Money stays invested with potential for growth. Can pass remaining funds to beneficiaries. | Investment risk – value can fluctuate. No guaranteed income. Requires careful management to avoid running out of money. |
| UFPLS (Uncrystallised Funds Pension Lump Sum) | Each withdrawal consists of 25% tax-free cash and 75% taxable income. | Tax-efficient for those who do not need their full 25% tax-free cash upfront. Can manage income tax liability more effectively. | Each withdrawal is taxed as income, so large withdrawals may push you into a higher tax bracket. Not all providers offer UFPLS. |
Option 1: Buying an Annuity
An annuity is a financial product that provides a guaranteed income for a set period or for life.
Types of Annuities
- Lifetime Annuity – Pays a guaranteed income for life.
- Fixed-Term Annuity – Provides income for a set number of years, after which you receive a lump sum or reinvest.
- Enhanced Annuity – Offers higher income if you have health conditions, such as high blood pressure or diabetes.
- Investment-Linked Annuity – Income fluctuates based on investment performance.
Case Study – Lifetime Annuity
Sarah, aged 65, has a £200,000 pension pot and wants financial security. She buys a lifetime annuity, which pays £10,000 per year for life. If she lives to age 90, she will have received £250,000 in total, more than her original pension.
Best for: Those who want a predictable, stable income with no investment risk.
Not ideal for: People who need flexibility or want to leave a pension inheritance.
Option 2: Pension Drawdown (Flexible Access)
Pension drawdown allows you to keep your pension invested while withdrawing income as needed.
Drawdown Strategies
- Taking only investment growth – Withdraw only the investment returns to help your money last longer.
- Fixed withdrawals – Take a set amount per month or year.
- Front-loading withdrawals – Withdraw more in early retirement, then reduce later.
- Combination approach – Mix drawdown with an annuity for stability.
Case Study – Pension Drawdown
James, aged 60, has a £300,000 pension pot. He withdraws £12,000 per year, covering his expenses while keeping the rest invested. With careful planning, his pension could last 25+ years.
Best for: People who want flexibility and the option to leave an inheritance.
Not ideal for: Those uncomfortable with investment risk.
Option 3: UFPLS – Uncrystallised Funds Pension Lump Sum
UFPLS is a flexible withdrawal method where each lump sum consists of 25% tax-free cash and 75% taxable income. This allows you to manage tax liability by spreading withdrawals over multiple tax years.
Case Study – Using UFPLS to Minimise Tax
Emma, aged 57, has a £800,000 pension. Instead of taking her 25% tax-free lump sum upfront, she withdraws £60,000 per year, ensuring £15,000 is tax-free, and £45,000 is taxed at her income tax rate. This helps keep her within the basic tax band.
Best for: Those who want a tax-efficient way to withdraw income.
Not ideal for: People who need a large lump sum upfront.
What Happens to Your Pension When You Die?
What happens to your pension when you pass away depends on your age at death and the type of pension plan you have. Below is an overview of the current rules:
| Age at Death | Tax Treatment for Beneficiaries |
|---|---|
| Before age 75 | Pension wealth passes tax-free to beneficiaries. No income tax or inheritance tax (IHT) applies. |
| After age 75 | Pension withdrawals are taxed at the recipient’s marginal income tax rate when drawn. No IHT applies under current rules. |
Changes from April 2027
The UK government has announced that from April 2027, pensions will form part of your estate for inheritance tax (IHT) purposes. This means:
- If your total estate (including your pension) exceeds the nil-rate band (£325,000 per person, £650,000 for couples), inheritance tax of 40% could apply to the excess amount.
- Even if your beneficiaries are basic-rate taxpayers, they may face a significant tax bill when inheriting pension wealth.
Why This Matters:
Many people have relied on pensions as a tax-efficient way to pass wealth to loved ones. With this change, it’s more important than ever to review your estate plan. There may be alternative strategies to reduce tax exposure, such as gifting assets, using trusts, or drawing down pension funds earlier.
Why Seeking Independent Advice is Essential
Retirement decisions often cannot be reversed, so getting expert guidance is key.
- Cashflow planning – Understand how long your money will last.
- Compare all options – Find the best annuity rates or drawdown strategies.
- Tax efficiency – Reduce unnecessary tax and keep more of your pension.
- Protect your family – Ensure your pension passes on effectively.
At Mather & Murray Financial, our independent financial advisers in Swindon and across the UK will help you plan, compare, and optimise your retirement strategy.
Next Steps – Book a Free Consultation
- Want a guaranteed income? We can find the best annuity rates.
- Need flexibility? We’ll create a personalised drawdown strategy.
- Looking for tax efficiency? We’ll structure your pension withdrawals effectively.
Book an appointment today with one of our experienced pension advisers in Swindon or nationwide.
Your retirement is too important to leave to chance – let’s plan for it together.
Your investments can go down as well as up. You may not get back the amount you invested.
