Important information - the value of investments can go down as well as up, so you may not get back the amount you originally invest.

There’s multiple options for those approaching retirement and looking to access their pension savings.

Those options mean you have the flexibility to shape your retirement income to suit you - but it also means you have many decisions to make. After saving hard for years, now comes the job of turning your retirement savings into an income.

If you’re confused or have questions about how to do it - don’t worry, you’re not alone. Fidelity’s retirement service deals with people in this position every day, providing specific retirement advice for a fee to some but also guidance for those who wish to make their own decisions.

We asked the Fidelity’s retirement specialists which questions they often received. Here are four questions many of our customers are asking, along with some answers.

1. What income options are available?

There are various ways you can turn your pension pot into an income. ‘Drawdown’ (sometimes called flexible retirement income) is increasingly popular - this is where your pension pot remains invested and those investments are managed in a way that produces a flexible income. You can take up to 25% of your pot as a tax-free lump sum straight away or in stages, with Drawdown income after that subject to Income Tax.

An annuity is another option. It is a product that turns pension savings into guaranteed income. The deal is that you hand over a pot of money and an annuity provider will pay an agreed level of income for the rest of your life. That makes it different to Drawdown - which leaves your money invested instead, with an income generated by investment returns, dividends and interest from bonds.

Each method has benefits and drawbacks. Annuities offer income that is guaranteed, no matter what markets do, but the money you use to purchase an annuity no longer belongs to you. Money invested in drawdown, on the other hand, is still yours but the income you get depends on investment returns, so can fluctuate - it is not guaranteed, there’s also a risk you could run short of money in later retirement if you take too much early on.

Finally, there is the option to leave your money in your pension pot and take lump sums from it as and when you need. The technical name for this is Uncrystallised Fund Pension Lump Sum (UFPLS). When taking lump sums like this, 25% of each withdrawal will be tax free, 75% will be taxed as earnings.

Thankfully, you don’t have to choose just one of these options - you can mix these together to suit your retirement goals. Learn more about your retirement income options here.

2. Should I take tax-free cash?

From age 55 - many years before most people will actually stop work - pension rules normally allow as much as 25% of the value of a pension pot to be withdrawn without income tax to pay. The attraction of tax-free cash is clear, but taking it isn’t always the right call. With a quarter of your pension pot generally at stake – a pot that’s there to support you for the rest of your life – it’s important to take tax-free cash in a way that suits you best.

If you don’t have a very good use for the money right now, be aware that taking the money from your pension only to let it sit in a bank account could come at a cost.

Once it’s in a bank account, any returns it earns could be subject to tax, whereas it would have grown tax-free in your pension. You may be able to re-home your tax-free cash inside an ISA to avoid this, but what you can pay in is limited, currently to £20,000 a tax year.

What’s more, the bank deposit and ISA will be included in your estate for inheritance tax purposes, whereas it is exempt from inheritance tax while in a pension, and having additional assets in a bank or savings account may affect your ability to claim certain state benefits.

You don’t have to take all of your tax-free cash at once. If your pension scheme supports it, you can access only part of your tax-free cash and keep the rest invested for later. This means you can continue to grow more tax-free cash for the future.

3. What happens to my pension when I die?

If you die before the age of 75, anything in your defined contribution pensions can be passed on to anyone you wish and the recipient won’t have to pay tax on it, as long as this is done within two years of the date of death. You can express to the company running the pension who you would like to benefit in case you die.

The money is not normally part of your estate, so no inheritance tax is due when it is paid out from the pension. Bear in mind that, if you have already started accessing your money, anything that you have withdrawn, including the potential 25% of it that is available to you tax-free, would fall inside your estate and therefore be liable for inheritance tax.

For funds still within the pension at death, beneficiaries can withdraw some or all of it, or take an income as if it were their own pension. They don’t have to be of pension age to get the money.

This assumes that you are within your own lifetime allowance for pension savings - currently £1,073,100 for most - when you die. If not, then a charge may apply before the money is passed on.

If death occurs after age 75, then the money withdrawn is liable to income tax at the recipient’s marginal rate.

4. Can I continue to contribute to my pension once I’ve accessed it?

Once you begin withdrawing taxable money from your pension pot - if you enter Drawdown, for example - the amount you are allowed to contribute to a pension is reduced.

Normally, we can pay £40,000 into a pension each tax year - known as the Annual Allowance. Once pension money has been accessed flexibly, however, a new limit may apply - the Money Purchase Annual allowance (MPAA).

The MPAA reduces the amount that can be contributed to your money purchase pensions in any one tax-year while still benefiting from tax relief to £4,000. If your taxable earnings in the year are below the MPAA then tax relief on money purchase pension savings is limited to 100% of your earnings (or to £3,600 if you have no earnings).

Just taking your tax-free cash or using your pot to buy a guaranteed income for life (an annuity) doesn’t count as taxable income for this purpose but taking a lump sum as an Uncrystallised Fund Pension Lump Sum (UFPLS) does.

Get support with your plans

If you are looking for support with your retirement plans, we can help you navigate your income options and allowances, and help you access your money. We offer free guidance as well as paid for advice services if you want recommendations based on your personal circumstances.

You can call us on 0800 860 0048. We’re open 9am to 5pm, Monday to Friday.

You may also want to contact the Government’s free and impartial Pension Wise guidance service which can help you understand your options at retirement. You can access their guidance online at www.pensionwise.gov.uk or over the telephone on 0800 138 3944.

Important information: You cannot normally access your pension savings until age 55. Tax treatment depends on individual circumstances and all tax rules may change in the future. Pension and retirement planning can be complex, so if you are unsure about the suitability of a pension investment, retirement service or any action you need to take, please contact Fidelity’s retirement service or refer to an authorised financial adviser.

Topics Covered

ISASIPP; Investing for incomeIn retirement

Latest articles

Investor hopes in the hands of the FAANGs

It’s a big week for tech - and markets everywhere


Ed Monk

Ed Monk

Fidelity Personal Investing

How to buy UK shares at a discount

Can investment trusts offer an advantage?


Graham Smith

Graham Smith

Market Commentator

Fidelity Sustainable Water and Waste Fund

‘A different way of looking at the world’


Toby Sims

Toby Sims

Fidelity Personal Investing