Your defined contribution pension scheme won’t automatically pay you an income. There are a number of options to convert your pension pot into an income. You can also choose to take some or all of your pension pot as cash.
• Buy a guaranteed income for life. An annuity will provide you with a guaranteed income for life. Your pension pot is passed to the insurance company of your choice (minus any cash you take), and the insurance company pay you an income for the rest of your life.
• Use income drawdown. With income drawdown, you leave your pension savings invested, but take an income when you need it. You can take what you want, when you want, but there are no guarantees. If you make poor investment decisions, markets perform badly, you take too much income or live longer than you expected, your money could run out.
• Choose ‘uncrystallised funds pension lump sum’ (UFPLS). With UFPLS, you don’t take a tax-free lump sum upfront. Instead, 25% of each payment of income is treated as tax-free. This means you do get a tax-free amount, but it’s spread over each payment.