Pension freedoms introduced back in 2015 mean that most people can do as they wish with their retirement pot from the age of 55.

There is a wide range of options available to those with defined contribution pensions, including taking cash lump sums, remaining invested while drawing an income, and buying an annuity to produce an income for life. While the choice may be welcome, it can be tricky knowing how to make the most of your lifetime savings, particularly as the cost of living soars, whilst ensuring they will last throughout your retirement, however long that might be.

We spoke to some of our Rest Less members about how they’re using their pensions to provide them with retirement income.

Mrs D, 65, from Sheffield, South Yorkshire, started drawing an income from her pension in November 2021 after a difficult time following the death of her husband.

She said: “I lost my husband in September 2020 to cancer very suddenly so the last year has been horrendous. I’d been living off savings and bereavement benefits for a year and needed help to deal with my pension.”

Mrs D had four private defined contribution pensions worth a total of about £140,000 and employed a financial adviser to manage these. “I wasn’t sure what to do. But I knew I didn’t want to buy an annuity because I wanted to draw what I want, when I want.”

Her adviser combined the pensions into a drawdown plan with Aviva, which can be easily monitored on an online platform. She holds a range of medium to low-risk funds, and pays her adviser a 0.75% fee a year. “I can’t afford to lose money, so this level of risk was right for me,” says Mrs D, who worked as an office administrator.

She will start receiving her State Pension in December 2022 and until then, she’s determined to minimise the amount of tax she pays on pension withdrawals. She’s expecting to get the full State Pension, at £185.15 a week in the 2022/23 tax year.

“I will only take about £1,000 a month from my pension to stay under my personal allowance,” she said. The personal allowance is the amount you can earn each year before being subject to tax, and stands at £12,570 for the 2022/23 tax year.

She chose not to take any tax-free cash from her pension, as she already has savings which may be used to supplement her income if needed. “Besides, savings rates are abysmal at the moment, so I’d rather stay invested,” she said.

Her income requirements are currently low, but she is worried about the rising cost of living. “But interest rates are rising so that should help a little with my savings,” she says. “To be honest, since I lost my husband, material things don’t matter and I’m sure I have enough to see me through my lifetime.” When she receives the State Pension she will reduce the amount she takes from the drawdown plan to £4,000 a year.

Fortunately, Mrs D has been reassured she has enough saved in her pension and cash savings, alongside equity in her home to tap into if needed in retirement. Ultimately, she’s relieved she sought financial advice at a difficult time.

She said: “I feel comfortable with my adviser and it’s a huge help, as it can be a nightmare knowing what to do otherwise.”

Mr K, 62, from Ipswich, Suffolk is managing his pension drawdown plan himself now he’s stopped working, but he’s worried about the rising cost of living.

He said: “The overall financial picture has been so stable for so long a degree of complacency had set in – it is so important to be able to make adjustments. At present I am still considering what, if anything, I need to change.”

“The only action I have taken so far is not to make any ‘big ticket’ purchases for the time being. Everything else will carry on as usual.”

He started making “serious plans” towards retirement in his early fifties, and retired from his job as a retail manager 18 months ago. “Years ago the thought of making the correct decision about annuities was certainly a worry. However the new rules, and the flexibility of drawdown has made life so much easier – you feel in control,” he said.

In April 2021, he chose to move his personal pension from Aviva to a drawdown plan with Vanguard. He has about £80,000 left in this pot, invested in a split of 40% stocks and shares, and 60% bonds, which is the level of risk he’s comfortable with. Ongoing fees for the Vanguard plan are low at just 0.22% a year.

He said: “In recent months supposedly ‘stable’ bonds have seen unexpected declines. Equities have been a better place to be in the short term. My pensions have been dropping in value. At present I am not making changes.”

In the tax year 2021/22, he drew a total of around £16,757 from his pension. This consists of a 25% tax-free lump sum of £4,187.50 and his tax-free personal allowance at £12,570. He will draw the same amount in the 2022/23 year, with any additional income he requires being taken from his general savings. “It’s my intention to draw the same amount each year until the Vanguard pot is empty,” he says.

He also has an Aegon defined contribution pension valued at about £120,000 which he will draw from in the future, and a defined benefit pension with L&G paying about £10,000 a year, plus a lump sum of about £60,000. When necessary, he will draw about 3.5% to 4% from the Aegon pension, but hopes to preserve its original value. “But my defined benefit pension is index linked up to a maximum of 5% (as many are). With inflation potentially up to 10% by the end of the year this will also cause a significant problem in the longer term. These pensions are not quite as attractive as a few months ago!”

He added: “There are also individual savings accounts (ISAs) and the State Pension. I would say my overall situation is above average, but way below many people who have pots running into millions.”

When he reaches age 66, he will receive £215 a week in State Pension, which is more than the flat-rate of £185.15 a week with a top-up made up of Additional State Pension. Read more about the Additional State Pension works and whether you might be entitled to it in our article State Second Pension and SERPS explained.

Mr K believes that many people should seek professional financial advice, despite currently managing his drawdown plan himself. “It’s so easy to make mistakes or not understand the impact a poor decision can have on your finances years in the future.”

But he added: “I would absolutely encourage people to spend time understanding pensions and not give up because it seems confusing. If they have a simple situation and understand the rules, they can make their own decisions.”

Mr J, 54, worked for the Civil Service before taking his pension benefits early, and moving in with his elderly mother to care for her. 

“I was lucky enough to be able to take my Civil Service pension at age 50,” said Mr J, who gave up work and claimed his pension at age 50 because of health issues, after paying into the scheme for 20 years.

He received a tax-free cash lump sum, and currently gets an income of more than £300 a month from the scheme. Along with inheritance, cash savings, benefits and other investments this provides him with enough income until he can claim the State Pension.

He said: “There are a lot of ifs and buts but if the State Pension keeps increasing it could be about £280 a week when I reach retirement age, in about 13 years’ time. That’s not a bad non-working income.”

As he’s been caring for his 90-year-old mother, who passed away recently, his outgoings have been minimal. He’s been receiving Carer’s Allowance at £67.70 a week in the 2021/22 tax year and £69.70 in the 2022/23 tax year. “This involved quite a big form to complete initially, but medical records easily confirmed mum’s need for a carer,” he said. “It’s important to check what benefits you’re entitled to.” Find out more about Carer’s Allowance and whether you might be eligible to claim it in our guide What is Carer’s Allowance and who gets it?

Previously, he worked for the NHS part-time for 16 years, and has savings built up during that time in two self-invested personal pensions (SIPPs) which currently have a combined value of around £40,000. He intends to cash this money in when he reaches age 55 in September 2022.

Mr J is single, child-free and doesn’t pay rent or a mortgage. “These factors might affect other people’s choices although I say, you never know what’s around the corner,” he said. “My plans are going to need a few changes in the future now my lovely mum has passed away.

You can still make money, even into old age, but the richest person in the world can’t afford even one extra second of life, so why waste time doing a job – or anything – you don’t enjoy. I’m happy with the choices I’ve made so far.”

Tips for maximising your pension income

Remember that everyone’s circumstances are different, and what’s right for one person may not be right for you. If you’re worried that your pensions might not provide you with enough to make ends meet, there are several ways you might be able to boost the amount of income you receive in retirement.

Consider delaying your State Pension

This could be a sensible approach for people who are still working. But first, get a State Pension Forecast to see how much you can expect to receive at retirement age.

For every nine weeks you defer, the government will increase your payments by 1%. This works out at just under 5.8% a year. Find out more about this and other ways to increase your State Pension in our guides Deferring State Pension – How much can I get and is it worth it? and How the State Pension works. 

Claim any benefits you might be entitled to

Citizens Advice can help check if there are any benefits you should be claiming. You can also check what benefits you might be entitled to using one of the  benefits calculators at Gov.uk. Millions of households are missing out on as much as £3,000 a year in Pension Credit, for example.You can find out more about this in our guide Pension Credit explained. 

Think beyond pensions

Retirement planning isn’t all about pensions. Aim to pay off your debts, and build up other cash and investments using tax-efficient individual savings accounts (ISAs), so you have money to boost your pension income when needed. Find out more in our guides Is it better to save into an ISA or a pension? and Everything you need to know about ISAs. 

Consider phasing your retirement

You could, if your employer will let you, reduce your working hours slowly so that you’re gradually winding down to retirement over an extended period of time before fully retiring, giving you plenty of time to remain invested and ride out the highs and lows of the stock market. Learn more in our guide How can I phase my retirement?

Maximise the potential of drawdown

You can make use of drawdown to take a flexible income stream from your pension whilst leaving your retirement savings invested. One of the major benefits of drawdown is the flexibility it provides, as you can decide how and when you take an income. For example, in years when you may have other sources of income if, say,  you’re still working part-time, you could take a smaller amount and gradually increase this over time. Read more in our article What is pension drawdown? 

Beware of cashing in pensions: Remember that pension income isn’t typically tax-free. Although you can withdraw up to 25% as a tax-free lump sum from age 55, after that any withdrawals are taxed at your marginal rate. So, if you withdraw a further £150,000 from your pension, for example, you’re taxed as if you earnt that in a single year. This risks incurring a hefty tax bill, which could be otherwise avoided by taking smaller sums spread over several years, for example. Find out more in our articles Should I take my pension tax-free cash at 55? and Should I use my pension to boost my income? 

Annuities may still have a place in your plan

Buying an annuity, or income for life, may still play an important role in your retirement planning, depending on your personal circumstances. A major advantage of annuities is that they guarantee your retirement income for as long as you live, which gives you financial security that you won’t run out of money. You could, for example, buy an annuity to cover your basic bills, and use a drawdown plan to take a flexible income otherwise. It’s up to you how to use your pension, and you may decide to take a combined approach. Read more in our guide Annuities explained.

Where to seek further help

If you’re 50 or over and have a defined contribution pension, you can get free guidance on the options available to you from the Government’s Pension Wise service.

However, if you want personal recommendations or advice about your specific circumstances, you can find a local financial advisor on VouchedFor or Unbiased, or for more information, check out our guides on How to find the right financial advisor for you or How to get advice on your pension.

If you’re considering getting financial advice and are looking for somewhere to start, Rest Less Pensions are offering a free Pension Health Check with one of their experts. They can offer you information and guidance on the call and at the end will discuss whether you would benefit from paying for professional financial advice. Capital at risk.

Are you drawing an income from your pension, or are you considering your options? Do you have tips for maximising pension income? We’d be interested to hear your views. You can join the money conversation on the Rest Less community or leave a comment below.

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