A: You have a number of options open to you. The most common are:-
Guaranteed Annuity: This provides a regular income for life which can be arranged on a level or increasing basis (a fixed percentage or in line with RPI). The pension can be paid to you monthly, quarterly, half-yearly or annually. It can include a guaranteed period, plus a spouses benefit, if appropriate, so that your spouse can continue to receive an income should you die first. An annuity can usually be purchased via your pension provider, or you can use the Open Market Option to potentially obtain a better annuity rate elsewhere.
Temporary Annuity: This provides you with a guaranteed income for a predetermined period, usually 5 years, as well as a guaranteed maturity value at the end. The maturity value can then be used to invest into an alternative pension arrangement, e.g. another temporary annuity, a lifetime annuity, drawdown pension, etc.
Investment-backed Annuity: Annuity payments will fluctuate with investment returns as income payments are regularly recalculated according to fund performance (equity-linked or With Profit). In effect, you would be giving up the guarantee as to the level of future payments in the hope that good investment returns will enable your payments to be greater in the longer term.
Drawdown Pension (Capped or Flexible) - Capped: Instead of buying an annuity, your fund remains invested and continues to benefit from investment performance in a tax-efficient environment. An income can be taken from your fund each year, although this will vary between limits. The maximum limit is derived from tables published by the Government Actuary's Department (GAD) and is based on your fund size, age and the current yield on long term gilts (loans to the government). There is no minimum limit and the maximum is set at 120% of GAD. Flexible: This option has no such maximum limit but you must be able to prove you already have a minimum income secured through other pension means of at least £20,000 pa, not be an active member of any other pension scheme and have paid no pension contributions (or had contributions paid on your behalf) in the same tax year in which flexible drawdown is to be taken.
Third Way Pensions: This option tends to sit somewhere between Guaranteed Annuities and Drawdown Pensions. They typically include an investment-backed element, which can potentially see your pension rise in the future, and also an underlying guarantee that your income (or fund value) will never fall below a set minimum. Your income is also guaranteed to be payable for life, or for a pre-determined minimum period.
Note: Pension income is taxable at your highest marginal rate. The pensions discussed are examples only and do not represent all available options and benefits. You are advised to speak to a qualified financial adviser before deciding on the best option for you.