What kind of pension scheme do you have?
To understand the choices you have at retirement, you firstly need to understand which type of pension schemes you have saved towards.
There are essentially two different types of pensions in the UK at present, these are referred to as:
- Defined Contribution (DC) sometimes called Money Purchase schemes.
- Defined Benefit (DB) also known as Final Salary or CARE schemes.
The two schemes are completely different in how they are set up, how they are regulated and what options you are allowed at the point of access.
Check your retirement age
Irrespective of the types of pensions you may have, you can normally access your pots any time from 55 onwards. This is known as your Normal Minimum Pension Age (NMPA). From 2028 Government has confirmed that unless you have a “protected “retirement age in your scheme, the NMPA will increase to age 57. Anyone born on or after 6 April 1971, could be affected by this change.
If someone tells you, they can unlock your pension before your NMPA it is likely to be a scam.
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Options at retirement from a DC scheme
Since 2015 the Pension Freedoms legislation has allowed you to access your DC pension pot flexibly. A summary of the main options is noted below:
- Option 1- leave it invested until you need to take it.
- Option 2- take all your pot as cash - a quarter is tax free and the balance is taxable.
- Option 3- take a quarter tax free and do “income drawdown” on the rest.
- Option 4- take a series of lump sums, the first quarter is tax free, the balance is taxable.
- Option 5- take a quarter tax free and convert the rest of your pot into an “annuity” (an annuity is taxable).
You may also be able to mix and match some of these options.
Options at retirement age from a DB scheme
The options you have from a DB pension scheme at the point of retirement are quite different to a DC pension pot and this is often a source of confusion for members.
With DB schemes the options you are generally offered at retirement are not as flexible compared to the options available from DC pots.
- Option 1- a pension income for the rest of your life, which is taxable.
- Option 2- a tax free lump sum and a smaller pension income for the rest of your life, which is taxable.
- Option 3- You can transfer your fund to an alternative pension arrangement. (If you do want to consider a transfer from your DB fund you may lose out on a number of guarantees, we would therefore strongly recommend you visit: https://www.moneyhelper.org.uk/en/pensions-and-retirement/building-your-retirement-pot/transferring-your-defined-benefit-pension for more information before you proceed)
The important thing to bear in mind is that if you wish to take option 2 from a DB scheme you must take your tax free lump sum at the same time as your regular pension income- you do not have the option to defer this as with a DC pension pot.
Get more advice
We know pensions can be a minefield so if you are a member and would like to speak one of Usdaw’s pension specialists get in contact with us on 0161 224 2804 or go to our ‘Ask a question’ page and we will email you by return.
Please be aware that we can only provide pensions guidance, therefore if it is independent financial advice you need, please visit our Money and Advice pages on the Usdaw website to find out more information about our affinity partners - Quilter Financial Advisers
