One of the biggest choices you will need to make is how to take your retirement income. One option is to use your pension pot to buy what is known as an annuity. An annuity essentially acts as a guaranteed income, paying you monthly for the rest of your life. However, once you have opted for an annuity, in most cases, this decision is irreversible so it’s important to get the best deal you can.
If you are considering an annuity, think about whether you want the amount of money it pays out to rise every year: this can help protect your income from inflation, but it means that payments in the early stages will be lower. If you have a partner, think also about taking out an annuity that will continue payments to them in the event of your death.
Another option is income drawdown. This is when your pension fund remains invested while you take income from it allowing you to benefit from potential further growth to your pension pot. With both options, any income you take from your pension is taxed as earned income.
From April 2015, there will be more choices available to retirees following a recent government reform of the pension sector. The changes mean you have more flexibility in how to access your pension income after age 55. It will also become easier to leave pension savings invested in the stock market and other assets and to take a regular income from them. To find out more about the changes see: ‘Pension reforms: What you need to know’.
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If you find yourself in the position where you have money left over each month, or if as a result of the new pension freedoms, you decide to take a tax-free lump sum from your pension fund, you could choose to invest it. By investing, your money could potentially continue to grow long into your retirement.
There are a number of ways you can invest your money, regardless of the wrapper you choose. Whichever you choose will depend on your appetite for risk, how long you plan to invest and your investment goals. You can learn more about risk in our article: ‘Risk vs Reward,’ and remember, the value of your investment can go down as well as up, and you may get back less than you invested.