The big six-o is around the corner and you are making plans. Like, how to celebrate the occasion itself - mega family get-together, short break somewhere special, self-indulgent day at a health spa. 

And, looking ahead, perhaps signing up for an OU degree, cruising to the Galapagos, writing your memoirs, walking from John O'Groats to Lands End for charity...

There is also something else you need to be thinking about: your pension. Many people believe that, when they reach retirement, their pension(s) will automatically start providing them with an income. Wrong. With the exception of a final salary pension - attached to your employment - there are decisions to be made before you receive any pension payments.

To begin with, the state pension. Currently, this is paid to women, born on or before 5 April 1950, at the age of 60. (Between 2010 and 2020 this threshold will be raised gradually to 65.) However, the state pension doesn't just happen - you have to claim it.

Four months before your qualifying birthday, the Pension Service sends you a retirement pack. This indicates how much your pension will be and how it is made up: on top of the basic state pension there could be additional state pension. For example, graduated retirement benefit and dependency increases.

The pack also lists your options. Essentially these are: 

• Retire and claim your state pension;
• Continue working and claim your state pension;
• Put off claiming your state pension for a while to receive extra money when you do claim.

Defer and get more

From 6 April 2005, the deferral option has become more attractive. For every five weeks you put off claiming, your pension increases by 1 per cent - the equivalent of 10.4 per cent per annum (compared to 7.5 per cent previously). So, a delay of two years would provide just over £2 extra for every £10 of your pension - around £16.60 extra per week on the basic state pension.

Alternatively, instead of choosing an enhanced rate, you can now take a lump sum, provided you defer your pension for at least one year. This sum will comprise all the pension money you have not claimed plus interest of at least 2 per cent above base rate. Although the lump sum will be taxable, there are special rules in the pipeline to prevent any adverse effect on age-related allowances and tax bands.

For many people nowadays, the state pension forms just part of their retirement income. They may also have an occupational pension plus top-up AVC/FSAVC, or stakeholder pension, or personal pension, or retirement annuity contract, and so on. In almost every case, except for final salary schemes, the pension fund must be used to purchase an annuity. This, in turn, will pay you a guaranteed income for the rest of your life.

Choose carefully

"One size fits all" does not apply to annuities. They come with a range of permutations designed to suit different circumstances and requirements. Deciding which combination of factors is right for you can be complicated. Take your time and seek as much advice as you need, mindful that there is one feature all annuities have in common: once you've chosen your annuity, that's it - for life. You cannot change the term or the provider.

Before you start considering the annuity itself, you should decide whether you want to take it now or later. Currently, your pension fund must be converted into an annuity by your 75th birthday (but changes are scheduled from April 2006). By delaying the start date, income normally increases because life expectancy reduces.

For example, the income from an annuity bought at age 65 could be 8 per cent higher than at age 60. Even more if, during the five-year interval, interest rates go up and annuity rates follow; also, the pension fund itself could grow in value. But what if interest rates go down? And don't forget to take the income you have forfeited into your calculations.

Tax-free cash

Another decision concerns tax-free cash. The majority of pension plans allow you to take up to 25 per cent of the fund in cash, as a tax-free lump sum. Most people take the cash and either pay off the mortgage, go on a spending spree or invest it elsewhere. If you leave it in the fund you will, of course, get a larger retirement income, but remember that this income is taxable. You will have lost out on the 'tax-free' element.

People with small pension funds - officially 'trivial' - are allowed to take their fund as a lump sum, with 25 per cent tax-free. The current 'trivial' limit is £25,000, from April 2006 it's £15,000.

If you have more than one pension fund, then the limit applies to all your funds added together.