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

What can I do with my pension pot?

You have several options for accessing the money in your defined contribution (DC) pensions when you come to retire.

You can take up to 25% of your pot tax-free from the age of 55 (rising to 57 in 2028), 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

If you take out an annuity as a result of using the service from HUB Financial Solutions, Which? will earn a commission to help fund our not-for-profit mission.

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Should I buy an annuity?

Until pension rules changed in 2015, an annuity was the default way that people turned the money in their defined contribution pensions into a retirement income.

This involve swapping your savings for regular guaranteed payments that last for the rest of your life. 

Likely to suit you if…

• you want a guaranteed income for the rest of your life
• you don't want your retirement income to be subject to stock market fluctuations
• you want your income to rise with inflation (although you'll need to opt for an index-linked product)

Should I use pension 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 each year (although you'll need to take tax 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. 

It has been announced that pensions will be brought into the inheritance tax regime from April 2027. This will mean that defined contribution pensions and drawdown plans are included within estates and therefore could make them subject to inheritance tax.

Likely to suit you if…

• you want your money to continue to be invested
• you want the flexibility to take money out as and when you want
• you want to be able to pass on any remaining money to loved ones

Should I cash in my pension?

You can choose to take your entire pension in one go as cash for you to spend as you wish.

The first 25% will be tax-free and the rest will be taxed at your highest tax rate (by adding it to the rest of your income).

There may be charges for cashing in your whole fund, and not all pension schemes will offer this option.

Likely to suit you if…

• you need to get your hands on the money quickly
• you've suffered from poor health and a guaranteed income for life might not be the best option
• you want to reinvest your money or have quick access to it

Should I take lump sums?

You can leave the money in your pension and take out lump sums when you need to.

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.

Each withdrawal is 25% tax-free, with the rest charged at your normal income tax rate when your other income is taken into account.

Likely to suit you if…

• you want to take varying amounts of money each time
• you want to spread your 25% tax-free allowance over a period of time
• you don't want to expose your pension to investment risk.

What if I've got a final salary pension?

If you have a defined benefit pension (also known as a final salary pension) 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. 

• Find out more: transferring your pension