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Money, tax and benefits

Money, tax and benefits

Options when you take your personal pension

There are several ways to turn your personal pension fund into a regular income for retirement. Following pension law changes in April 2006, new rules make your options simpler and more flexible.

When can you take your personal pension?

By April 2010, the minimum age at which you'll be able to take your company or personal pension will have increased from 50 to 55. You can put off taking it until age 75.

However, you may still be able to take your pension before age 55 in certain circumstances, for example if you are unable to work due to ill-health. Your pension administrator will be able to tell you what your scheme allows.

Options since 2006

Following changes made to pension rules in April 2006, there is now more choice for how and when you can take your pension benefits. But bear in mind that pension schemes are subject to individual rules so you'll need to check with your pension administrator what your particular scheme allows.

A more generous tax-free lump sum

You can now take up to 25 per cent of the value of your total pension savings from all sources as a tax-free lump sum when you retire, up to a maximum of 25 per cent of the 'lifetime allowance' for that tax year.

For the tax year 2008-2009 the lifetime allowance (tested against your total pensions savings) is £1.65 million, gradually rising to £1.8 million by 2010-2011.

If your total pensions savings exceed the lifetime allowance you can take the excess as a cash lump sum, subject to a 55 per cent tax charge.

Lump sums from small pension funds

If your total pension savings from all sources was £16,500 or less (one per cent of the 'lifetime allowance') you may be able to take the whole amount as a cash lump sum, with 25 per cent tax-free.

The limit for being able to take the whole fund in cash will gradually rise to £18,000 by the 2010-2011 tax year.

Drawing an income from your pension

You have the following options (after you've taken any tax-free lump sum):

  • use the (remaining) fund you've built up to buy an annuity (a regular income payable for life) from a life insurance company; this does not have to be the same company that you have your pension plan with
  • draw a taxable income directly from your pension fund, as an 'unsecured pension' before age 75
  • draw a taxable income directly from your pension fund, as an 'alternatively secured pension' from age 75 (similar to income withdrawal but with lower withdrawal limits)

Tax on pension income if you've exceeded the lifetime allowance

If your total pension savings have exceeded the lifetime allowance, the excess amount is taxed at 25 per cent; income taken from your pension pot will then be taxed at your usual Income Tax rate

For more information on ways to take your pension visit the Financial Services Authority (FSA) website.

Buying an annuity

The income you get from an annuity depends mainly on the size of your pension fund and how long the annuity is expected to be in payment. It also depends on the pension provider. Because you don't have to buy an annuity from your own pension provider, it's important to shop around to get the best deal.

Common types are:

  • level – pays the same income every year
  • increasing – increases your income every year by either a fixed rate or a rate linked to inflation
  • investment-linked – linked to investment returns usually based on the performance of a fund managed by the annuity provider
  • joint-life – pays an income to your partner if you die before them
  • enhanced – pays a higher rate if you have an illness that is likely to affect your life expectancy

Getting advice on pensions

Unless you have a sound understanding of personal pensions, you should consider getting professional advice on the options available. You can get general information free of charge from many organisations. Read 'Getting information and help with pensions' to find out more.

However, only advisers authorised by the Financial Services Authority (FSA) can offer you pensions advice. They will look at your circumstances and recommend the most suitable product for your needs.

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