An annuity might be right for you!

1. take benefits as cash (on one or two occasions),
2. transfer to an arrangement which allows you to ‘draw down’ regularly from your ‘pot’, the amounts that you specify, to meet your income needs,
3. buy an annuity (paying you a guaranteed income for the rest of your life) with an insurance company.

… or a combination of these.

With all three choices, the general rule is that 25% of what you take is tax-free and the rest is potentially taxable.

Taking cash – This seems self-explanatory. However, it is important to keep track of the tax that HMRC have deducted and to apply for a refund (after the end of the tax year) if you think that they’ve deducted too much tax.

Draw down – This means that you retain control of your ‘pot’ but that you bear the risk of running out of money if you draw down too much.

Buy an annuity – An annuity pays you a guaranteed income – usually for life (although fixed-term annuities are also offered by some insurance companies). Under this option, you transfer your pot to an insurance company, and you no longer have a claim on the pot. When people buy an annuity from an insurance company, there are restrictions in what the insurer can do with the money. Typically, annuities have to be backed by government bonds ‘gilts’. In recent years, gilts have offered a low investment return, and this has made annuities expensive to purchase – put another way, people simply did not see them as offering value for money. With the ‘pension freedoms’ introduced in 2015, many pension members shunned annuities and decided to:

• take their pot as cash, or
• keep it invested in the funds of their choice and to draw down money as they see fit.