Drawing your pension: what you need to know

Once you're retired, there are two main ways you can draw an income from your pension.

The most common option – an annuity – pays guaranteed income for life that will depend on factors such as your life expectancy.

Annuity types include:

LEVEL - This pays the same amount of income year in, year out.

JOINT LIFE - Your partner will be paid an income after you die. The more you choose to be paid out after your death, the smaller the income you receive while you are alive.

INFLATION-LINKED - The payouts rise and fall in line with the annual rate of inflation, as measured by the retail prices index. Over the long term, this can be beneficial as income will keep pace with living costs, but initial rates will be far lower than level annuity rates.

SHORT-TERM - This pays income for no longer than five years. It may be attractive to someone who wishes to defer buying a lifetime annuity.

Income drawdown

The alternative to annuities is income drawdown, whereby you take a tax-free lump sum from your pension fund but the rest remains invested, so it can continue to grow.

You can choose to take regular taxable income. This increased flexibility, however, may lead to increased administration costs. And the income you receive isn't guaranteed, as the value of investments can fall as well as rise.

But with annuity rates at an all-time low, it's becoming a more popular option.

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