Approaching retirement

As you get closer to retirement, you'll need to consider your options carefully to make sure you make an informed decision on how to make best use of your savings in retirement.

Many pension providers will start contacting you from age 50 with more information about the options you have but here are some actions you can take now.

Check how much is in your pension pot

Contact your provider for a current valuation. If you're a Legal & General customer log in or register for your online account to see how your pension is performing.

Find out what you can do with your pension pot

There are a number of options. Take time to think about which options suit you best:

• Leave your pension pot untouched until you need the money
• Use some or all of your pot to buy a guaranteed income (annuity) for life or a fixed term - you can usually take up to 25% of your pot as a tax-free cash lump sum (subject to your allowances) before buying the annuity, and the income will be taxable at your marginal rate.
• Take a flexible income direct from your pot - you can usually take up to 25% of your whole pot as a tax-free cash lump sum and the rest as a regular or occasional taxable income
• Take a series of smaller sums, usually 25% of each amount taken will be tax-free with the remainder taxed at your marginal rate
  • A combination of the options above, or
  • Take your whole pension pot as cash – usually 25% will be tax-free and the rest will be taxable

Your income in retirement is taxed, just like when you're in work. Any money taken from your pot that is not tax-free will be added to your taxable earnings and could increase the rate and amount of tax you pay.

Learn about your options

Plan how long your money needs to last. You need to think about when you'll start taking money from your pension pot and how much you'll need at different times.

Plan when you can retire

• Can you afford to be flexible with your retirement age?
• Will you have enough savings to give up work altogether and live off your savings and pensions?
• Do you need to consider 'phasing-in your retirement' by working for longer or reducing your hours over a period of time?

You don't have to give up work to start accessing your pension pot, but the amount you can continue paying into your pension could be reduced once you’ve accessed it, depending on which option you choose.

Work out how much you'll have in retirement

Try to work out how much money you'll have available from your pensions and other sources and whether it will cover your costs. You can use our interactive retirement planner tool to see how much your pension pots might be worth at your expected retirement age. 

Shop around for the best product and option to suit your needs

You don't have to stay with your current pension provider and you could benefit from shopping around and comparing what's available.

Find lost pensions

You can trace your pensions by using the Government's Pension Tracing Service and contacting your previous employers and pension providers yourself.

Review your personal finances.

Consider any financial commitments you have, such as a loan or mortgage.

• Will you be able to pay these off before you stop working?
• Do you have any other savings or investments?
• Will you need to rely on them, and do you need to give any notice to access them?

Our deciding how to use your pension tool aims to help you understand some of the decisions you need to make when thinking about how to use your pension pot.

If you're nearing retirement it’s a good idea to make an appointment with Pension Wise. It’s a free government guidance service from Money Helper to help people aged 50 or over to understand the options you have for your pension pot.

If you're unsure about your options and want help making decisions about your future we recommend that you speak to a financial adviser. You can find one in your local area by visiting Unbiased.

Alternatively, we offer a Retirement Advice service for over 55s. Our advisers can help you review what you have and need, then giving you expert advice about how to make best use of your money to achieve the best outcome for your retirement.

You can use some or all of your pension pot to buy an annuity, taking up to 25% of the amount selected as tax-free cash.

An annuity will provide you with a guaranteed taxable income for life or for a fixed term depending on the type of annuity you buy.

There are different types of annuities:

• Lifetime Annuity - will pay you a regular income for the rest of your life.
• Flexible Annuity - will allow you to vary your income perhaps a larger amount now, and a smaller one later on.
• Fixed Term Annuity - will provide you with a regular income for a fixed period of time only.

Income from an annuity is taxable and the amount you're offered could vary significantly, particularly if you have any health or medical conditions, or relevant lifestyle factors such as smoking, so it’s important to shop around.

Flexi-access drawdown allows you to select some or all of your pension pot and take up to a maximum of 25% of the amount as a tax-free cash lump sum while the remainder stays invested.

You can take regular or occasional amounts as income for the life of your pot. However, a fee may apply.

After taking any tax-free cash, your remaining pot will stay invested in line with your chosen investment options until you choose to take money out. You can usually change your investment fund selection at any time, but you should check with your provider.

Staying invested means your pot may benefit from additional investment growth, helping to continue to build your savings while drawing an income.

However, the value of the investments that make up your pension pot may go down as well as up. The value of your pot will depend on investment performance in addition to other factors (such as charges and the effect of inflation), including how much income you choose to take.

The more you take the more likely the savings in your pot may run out. You will need to consider:

• How much you take out in the earlier years.
• If contributions are continuing.
• Charges.
• How investments perform.
• What happens if you live longer than expected.

Not all schemes offer this option. 

For more information about taking flexi-access drawdown from your pot with Legal & General, please take a look at your scheme documentation.

You can take some or all of your pot as a cash lump sum, usually up to 25% of this will be tax-free with the remaining monies taxable as income. Unless you take your entire pot anything remaining will stay invested until you're ready to access your pot again. Using a pot of £10,000 for example, you could take:

• £2,500 as a tax-free cash lump sum with the remaining £7,500 taxed as income, or
• £2,000 each year until your pot runs out. £500 of each £2,000 payment can be tax-free

You could even take £5,000, with £1,250 of it tax-free, and leave the remaining £5,000 invested until you're ready to access more. Other options may be suitable for your individual circumstances.

You'll need to have a sufficient lump sum allowance available to take the full 25% of your pension pot as a tax-free lump sum.

For more information about taking a cash lump sum from your pot with Legal & General, please take a look at your scheme documentation.

There’s no need to access your pension pot until you want to. Whether you don't need the income just yet, prefer to keep working or something else - when you access your pension savings is up to you.

If you want to, you can continue to save into your pension and decide what to do at a time that suits you. Your pension pot remain invested, which means their value can go up or down.

Potential benefits

• Leaving your money invested gives it more chance to grow.
• You can keep paying into your pension, to build up your pension savings.
• You can make a decision when the time is right for you.

Considerations

• As with any investment, there's a chance that your pension pot could go down in value too.
• As soon as you start taking an income from your pension pot, you'll be subject to the Money Purchase Annual Allowance.
• If you received quotes for some of your options available for you, these aren't guaranteed and the payment amount you actually receive may be different.
• In periods of market uncertainty you might experience fluctuations in the value of your pension pot. Find out more about the effect that market movements could have on your pension savings, on our hub: Uncertain times hub.