Just because you can, does that mean you should? The answer to that is that it very much depends on your individual circumstances, and you should always take expert advice before drawing on your pension pot, because getting it wrong can dramatically affect your financial health later in life.
One important aspect is that even if you have accessed your pension pot, you are still able to work, and indeed you can still contribute to your pension and take advantage of the tax benefits of doing so (although the amount you are able to contribute each year is reduced).
When the time comes to draw on your pension, there are a number of options, the main three of which are taking a lump sum (up to 25% of the value of your pension pot is tax free, to a maximum of £268,275), buying an annuity or Flexible income drawdown.
An annuity gives you a guaranteed yearly income for the rest of your life – and the rest of your spouse’s life if you choose that option. You can choose to have this amount rise each year to help counter inflation. The advantage is clear: you will receive a guaranteed income. The downside is that the annuity dies with you (or on the second death in the case of a joint annuity). Some people choose to take all their pension savings in this way; others choose to take part this way and part more flexibly.
Income drawdown sees your pension pot left invested, allowing you to draw lump sums or income as you need it. This can be more flexible than an annuity, should, for example, you continue to work part-time in the early years of your retirement. Whatever is left when you die forms part of your estate and will pass to your heirs – although from April 2027, pensions are expected to be subject to inheritance tax. The downside is that you will remain exposed to investment risk, and there is no guarantee that your pension pot will be sufficient to provide you with an income for the rest of your life.
It's complicated, and will be different for every individual. That is why taking tailored advice is so important.
