What can you do with your pension pot?

Senior citizens usually look forward to retirement, as it is an opportunity to spend more time with their friends and loved ones, pursue hobbies and simply get more rest after they have worked for a lifetime. However, in order to relax, one must have no financial worries, because there is nothing more stressful than reaching retirement age and discovering that your pension wasn’t planned properly. To prevent unpleasant surprises, you should seek free pension advice from an early age and establish what you will do with your pension pot. In the UK, as of April 2015, you have three options for using your pension money. These do not apply if you have a final salary, so talk to your employer to clear all doubts.

Withdraw a cash lump sum

The first thing that you can do with your pension pot is withdraw it in a large lump sum or, alternatively, withdraw it in multiple, smaller stages. This withdrawal option is recommended if you are in debt or if you need to pay a mortgage. However, it’s all up to you. Don’t forget to consider taxes. In the UK, only ¼ of the withdrawal is exempt from taxes, and for the rest, the highest tax rate applies.

Income drawdown scheme

For those who have a considerable pension pot, investing in an income drawdown scheme is an excellent option. In this case, your pension pot will be moved into a scheme, which in turn is invested into the stock market. Afterwards, you will be able to withdraw money from it and fund your own retirement. This option has several disadvantages: your income depends on the stock market, which is very volatile, so it will fluctuate. Moreover, you might have to pay large fees and no one can guarantee large your income will be. There is no annual withdrawal limit, which some see as a benefit, but withdrawing all your money at once is not very prudent.

Buy a lifetime annuity

Last, but not least, you can use your pension pot to buy a lifetime annuity. Through this annuity, your savings are transformed into an annual pension, so you will receive income regularly for the rest of your life. This is seen by many as the safest and wisest option, because you don’t risk running out of money. There are several types of annuities available, so make sure you seek bespoke pension advice to find out which option is right for you and your family.