Pension payments

Pension payments from a pension can be made in several forms such as income from an annuity or as a lump sum through triviality.

Tax Free Cash

When you first take benefits from your pension, one of the pension payments that you can receive is a single payment of up to 25% of your fund as a tax free cash lump sum. This lump sum does not affect your tax position and you may use it however you wish.

You don’t have to take all your tax free cash in one pension payment, instead you may split it out into several pension payments whereby you receive a set percentage such as 5% of the pension fund each time until you use up the full 25% entitlement.

Triviality

Another lump sum option you may take as a pension payments is that of triviality. Triviality allows anyone who has a very small pension pot (of all your pensions added together) to take their entire fund/s as a pension payments lump sum. 25% of this fund will be provided as a tax free amount and the residual amount will then be subject to your relevant tax threshold.

With triviality pension payments you have to be aged 60 or older and must not have taken any previous pension benefits or pension payments in order to qualify.

Annuity

The most common type of pension payments is that of annuity payment. Annuities are designed to provide you with a guaranteed income for life. When you come to your retirement age you can use your pension fund to purchase an annuity from an insurance company who will then make regular pension payments to you for the rest of your life.

Annuity pension payments can be paid in whatever manner best suits you such as monthly, bi-monthly, half yearly or yearly for example. The pension payments you receive from an annuity are designed to pay out for life and can only increase in amount if you select an appropriate growth option such as RPI escalation, but this will significantly reduce your initial pension payments from the annuity.

Income Drawdown

Income drawdown is an increasingly popular  alternative to an annuity as a source for pension payments in your retirement, especially now that there is no upper age limit for when an annuity must be purchased.

Income drawdown allows you to take pension payments directly from your pension fund rather than selling it to purchase an annuity. As such the pension payments you receive can be altered by you to meet your requirements at the time, and you can pass on your fund to your beneficiaries when you die.

However, without proper management it is also possible for you to use up all of your pension fund amount before your need for pension payments ceases.

Note: The above is based on our understanding of current legislation and tax rules and are subject to change by the government. Tax reliefs referred to are those currently applying. Please note the value of investments can go down in value as well as up and you may get back less than you invest.