Pension options: what can I do with my pension pot?

How can I access my pension?

You can't take money from your pension until you're at least 55 (rising to 57 in 2028), but you can do so at any point after that. 

You have several options for accessing the money in your defined contribution pension(s).

You can take up to 25% of your pot tax-free (up to a maximum of £268,275 across all your pensions), and then access the rest of the money using any combination of the following:

• Buy an annuity
• Keep it invested and take income when you need (pension drawdown)
• Take some or all of it as cash

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Should I buy an annuity?

Buying an annuity involves swapping some or all of your retirement savings for regular guaranteed payments that last for the rest of your life. 

Once you've bought an annuity, you can't reverse the decision.

Pros

• provides a guaranteed income throughout retirement
• this income will not be subject to stock market fluctuations
• different types of annuity are available – you can choose one to fit your needs

Cons

• once you buy annuity, the decision can't be unwound. You won't be able to alter your level of income or switch to another provider
• your income is usually fixed from the outset, although you can choose for your payments to rise with inflation
• you can't pass on income from an annuity after your death unless you arrange this from the outset - for example, by choosing a joint-life annuity

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Should I use pension drawdown?

After you've taken your tax-free lump sum, you can move some or all of the remaining money into drawdown. 

Pension drawdown allows you to keep your pension invested, and draw out income as and when you wish. You can take out as much as you want, although this money will be subject to income tax, so you'll need to take that into account.

If you die before 75, your beneficiaries can access any money remaining in your drawdown plan tax-free. If you're over 75 when you die, the money you pass on will be taxed as income. 

Any money left in your pension or drawdown plan when you die is currently exempt from inheritance tax, but that is set to change. From April 2027, this money will be added to the rest of your estate, meaning that it could be subject to inheritance tax if the total value of your estate exceeds the tax-free allowances. 

Pros

• your money can continue to benefit from investment growth
• provides the flexibility to take money out as and when you want
• allows you to pass on any remaining money to loved ones (but this may be subject to inheritance tax)

Cons

• the value of your pot could take a hit if your investments underperform
• your money could run out if you draw out too much, too soon
• you'll have to pay charges on the investments you hold, as well as those levied by your drawdown provider

Should I take lump sums?

You can leave the money in your pension and take out lump sums when you need to (or even take the whole pot in one go).

The technical term for this is uncrystallised funds pension lump sums (UFPLS). This just means that you haven't 'crystallised' your pension pot by turning it into an income.

You can only opt for UFPLS if you haven't already taken money from your pot in another way.

With each lump sum you take, 25% will be tax-free (up to a maximum of £268,275), and the rest is treated as income and taxed in the same way.

For example, if you take a £20,000 lump sum, £5,000 of this would be tax-free and £15,000 would be treated as income. 

If you don't have any other sources of income, the first £12,570 (your personal allowance) will be tax-free, meaning the remaining £2,430 will be taxable. 

Pros

• can be a good short-term option if you haven't yet decided how to access the rest of your pot
• gives you flexibility to take money when you want
• you can minimise your tax bill by spreading withdrawals over different tax years

Cons

• your pension remains invested and so its value can fluctuate 
• if you make a large withdrawal, this can push you into a higher tax bracket
• you could run out of money if you withdraw too much, too soon 

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'You can take a mix-and-match approach'

Paul Davies, Which? pensions expert, says:

'Deciding how to access your retirement savings isn't a straightforward decision. You’ll need to think about how much tax you’ll pay, how to make your money last throughout retirement and whether you want to be able to pass any of it on to loved ones. 

Bear in mind that you can take a mix-and-match approach when converting your retirement savings into income. For example, you might decide to start off with drawdown, and then buy an annuity later in retirement. 

If you’re uncertain about what to do, you should get some help from either Pension Wise, the government’s free retirement guidance service, or pay a regulated financial adviser for tailored recommendations.' 

Can I still pay into a pension I've taken money from?

If you're under 75, you can continue to save into a pension and benefit from tax relief, even if you've already started taking money from it.

There is a cap on the amount you can save into a pension each year while still benefitting from tax relief, known as the annual allowance. This is set at £60,000, or 100% of your income if you earn less than £60,000.

However, this limit falls to £10,000 a year (known as the money purchase annual allowance or MPAA) once you access your pension via UFPLS or drawdown. The MPAA won't be triggered if you've only taken your tax-free lump sum.

What if I've got a final salary pension?

If you have a defined benefit pension (also known as a final salary pension) you won't need to make a decision about how to access your money as you will receive a guaranteed income for the rest of your life. This is either based on your ‘career average’ earnings, or your final salary. 

Depending on your scheme, you may have the option to transfer your savings to a defined contribution scheme (as long as you're not already receiving payments). But you're usually better off leaving your money where it is.