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Pensions – Make the most of your retirement

After retirement age, you will rely on your pension to pay for your daily living. The sooner you start investing for your future, the more comfortable your retirement could be.

What is a pension?

A pension is a special financial product that invests money you have contributed, with the aim to grow the fund so that you have a good income in retirement. Often your employer will contribute to the pension scheme, and there are many tax benefits when you pay in.

You could have a single pension or various different funds and workplace pensions. You may also receive a State Pension from the Government.

When can I withdraw money from my pension pot?

The minimum age at which you can start taking money out of your pension is usually 55, but this can vary depending on your scheme and provider. At this age you can withdraw up to 25% of the total pot as a tax-free lump sum.

Before you take any money out, it’s important to think about how long it might need to last. You should aim to withdraw funds from your pension pots at a safe rate so that it does not outlive you.

How can I use my pension pot?

The main options for how you use your pension funds are:

  • Taking all or some of it as cash
  • Buying a product that pays you a guaranteed income for life, often called an Annuity
  • Reinvesting the money to gain a regular but flexible income – sometimes called ‘flexi-access drawdown’

Your pension provider may not offer all of these options, and if your preferred choice isn’t available, you can transfer your pot to a different pension company.

Cash withdrawals and lump sums

Some people choose to take their whole pension as a cash lump sum. If your pension scheme allows, you can withdraw the whole lot in one go, or in a series of smaller sums. You can also make several withdrawals over months or years.

Sometimes fees and charges apply when you withdraw cash, so it may be better to withdraw funds less often.

Remember too that only the first 25% of your pension fund is tax free: the remaining 75% is taxed. Bear in mind that taking a large sum could push you into a higher tax bracket for the year.

Annuities / guaranteed income for life

Buying an annuity turns your pension savings into an annual pension. You can choose whether you want a guaranteed income for life or for a set period of time.

You can buy your annuity from any provider, you don’t have to stay with the company that runs your pension. It is a good idea to get quotes from a few providers to find the most suitable deal.

Some considerations for annuities might be:

  • Flexibility – Can you increase your income in line with cost of living increases?
  • Choosing for life – Once you have bought an annuity, you can’t change your mind or switch to another plan or provider.
  • Criteria – Some providers set a minimum investment amount, and their rates may change depending on the economy or stock market performance.

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Income drawdown

With a drawdown scheme, you transfer some or all of your pension pot into a scheme that invests your money on the stock market. Your investments generate an income, and there are no limits on how much you withdraw.

Things to consider when looking at income drawdown include:

  • Fees – These can be expensive.
  • Guaranteed income – There are no guarantees with drawdown and you could potentially run out of money.
  • Risk – Your investment could decrease or increase depending on stock market conditions.

Will taking money from my pension pot affect my benefits?

Some state benefits are ‘means-tested’ – so if you have a certain amount of money in the bank or tied up in assets, you are not eligible.

Means-tested benefits include Pension Credit, Housing Benefit, Council Tax Support,
Income Support, Income-based Jobseeker’s Allowance and Income-related Employment and Support Allowance.

Taking funds from your pension pot could take you over the limit for these benefits, so seek advice and plan carefully to avoid losing out.

How can First Thought Financial Services help me?

As professional pension advisers, it’s our job to help you plan carefully to maximise your income in retirement.

No matter what stage you are at in your working life, we spend time exploring your situation, examining any pensions you have in place and deciding how best to manage your money now and in the future. We also allow for tax, benefits and any other key considerations.

To see how we can help you, get in touch today.

The value of pensions & investments and any income from them can fall as well as rise. You may not get back the amount originally invested.

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.

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