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When it comes to pensions, this term is pretty straightforward – it almost describes exactly what it means!
When you retire, you can normally take up to 25% of your pension pot as a tax-free lump sum (some older pensions may allow you to take more). This sum can be used for whatever you like: a round-the-world trip or to repay your mortgage – it's up to you! Your remaining pension fund is then used to provide an income in retirement, whether that is through an annuity or otherwise.
Under the pensions freedoms rules that came in from April 2015, you don't have to take all of your 25% tax-free cash as a lump sum. You can now take an income direct from your fund, and each payment made by your pension provider will be 25% tax-free and 75% taxable as income.
As always – and particularly when it comes to your retirement options, which can be difficult or impossible to change later – it's important to seek professional advice from an independent financial adviser if you are in any way unsure.
The more you take out of your pension pot as a lump sum, the less you will have remaining to provide you with income, unless of course you use the proceeds to supplement your income. You don't have to take all, or any, of your pot as a pension commencement lump sum, so think carefully before you do.
Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.