(a) Buy an annuity.
An annuity is a product that turns your pension pot into a guaranteed income for life. There are three main types of annuities:
(i) A level annuity, where the payments stay the same every year.
(ii) An escalating annuity, where payments go up every year
(iii) An investment-linked annuity, where payments can go up or down every year depending on how the investment has performed. These tend to have a ‘secure level’, an amount which your income will never drop below.
As at April 2023, a 65-year old purchasing an annuity on a level basis would need to live just over 14 years to recoup the purchase price (quote based on £150,000 purchase price, no health issues, single life, no guarantee and paid monthly in advance. Quote generated 19/04/23). Many annuities are also inflexible, so they may not match your needs if your circumstances change in future. However, many people still buy annuities for peace of mind; they pay you an income every year for as long as you live.
(b) Take money directly from your pension fund.
You can decide to take the whole pot in one go, or draw a steady income as required. With most pensions invested in the financial markets, the latter option offers potential to benefit from any fund growth. However, you could lose out if the value drops during your retirement.
Most people will want to draw a sustainable income throughout the rest of their lives. It’s vital that the funds you invest in match your attitude to risk, and get reviewed regularly. Many new retirees decide to move their money into more cautious investments, to protect the money they’ve accumulated.