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Other retirement options

All these options involve extra costs and extra investment risk compared with buying a lifetime annuity at retirement. They are not usually suitable if you have a small pension fund (after taking any lump sum) or you have no other assets and sources of income to fall back on.

Phased retirement

Phased retirement uses part of your fund to buy an annuity. The rest of your fund remains invested. You can later use another portion of your fund to buy another annuity. In this way you can provide a flexible income.

Each time you convert part of your plan to an annuity, you can take part of it as tax-free cash. Insurance companies often set a minimum fund size for annuity purchases.

Phased retirement is complicated and needs thought, planning and management. You'll probably need some specialist financial advice – see Getting financial advice

Unsecured pensions

If, for whatever reason, you decide that you’re not ready to buy a lifetime annuity, you will have the option of an unsecured pension using either:

  • short-term annuities; or
  • income withdrawal.

An unsecured pension means that after taking any tax-free cash, the remainder of your pension fund remains invested.

Short-term annuities

With a short-term annuity, you can use part (or all) of your pension fund to buy a fixed-term annuity lasting up to five years. You can choose your annuity options in much the same way as basic lifetime annuities. In the meantime, the remainder of your fund continues to be invested.

At the end of the term of the annuity you can buy another short-term annuity. You can also combine income from a short-term annuity with income withdrawal. However, you must take an income from your pension fund from your 75th birthday. Generally this is in the form of a lifetime annuity.

Income withdrawal

With income withdrawal, you can take a taxable income direct from your pension fund while the remainder remains invested.

Income withdrawal is an option with most personal pensions and some occupational money purchase schemes. In some cases if you are in an employer’s scheme and want to use income withdrawal, you must first transfer your pension rights from that scheme to a personal pension. You will probably be charged for this.

Every five years your pension provider must review the amount of income you withdraw. This must be below the limit set by HM Revenue and Customs. Your pension provider calculates this. You can withdraw any amount from your fund as long as it's below this limit. There is no minimum amount of income that must be taken. However, you must take an income from your pension fund from your 75th birthday. Generally this is in the form of a lifetime annuity.

Alternatively secured pension

At age 75, if you haven't bought an annuity, another option is to use an alternatively secured pension. This works in a similar way to unsecured pensions but has different limits and rules.

Alternatively secured pensions are not suitable for everybody and it is important that you take professional advice if you are thinking of taking this option. Inheritance tax and other significant tax charges may apply to any leftover funds on your death.

All these options involve extra costs and extra investment risk compared with buying a lifetime annuity straight away. They are not usually suitable if you have a small pension fund (after taking any lump sum) or you have no other assets and sources of income to fall back on.

New options are now available which remove much of the investment risk but may still involve extra costs.

Hybrid products

An option if you don't want to commit yourself to a lifetime annuity but don't want the investment risks of income withdrawal. These new products pay a regular income and offer guarantees of either:

  • investment growth; or
  • the amount of pension fund you can expect to have left to buy an annuity later on.

These new products vary in what they're called, the guarantees they offer and the charges they make to cover the cost of the guarantees. You generally have to give up some investment growth potential to pay for the guarantees.

It's a good idea to get professional advice on these and other retirement options – see Getting financial advice