Now that you have an idea of your options for withdrawing retirement savings, you can find out more to help you decide what might be the best option for you.
The normal age you can withdraw benefits is from age 55, although this is rising to age 57 after 6 April 2028. In some circumstances you may be able to take benefits earlier than this. For example, if you have a pension with a protected pension age or you’re unable to work due to ill-health (as defined by your pension scheme).
Scroll through to read each option or click to skip to your preferred section:
- Cash lump sums
- Flexible regular income
- Annuities (guaranteed income)
- Choosing a combination of options
Cash lump sums
Depending on your pension type, you may wish to take some or all of your pension pot as a cash lump sum. There are different ways you can do this – we’ve outlined how they work and some things to think about when choosing each option.
This information is based on our understanding of current taxation law and HMRC practice, which may change. The tax treatmentwill depend on your individual circumstances and may be subject to change.
Full lump sum
How a full lump sum works
With a full cash lump sum, you withdraw your entire pension pot at once. This is known as an uncrystallised funds pensions lump sum (UFPLS), and allows you to save or reinvest the money however you like. Up to 25% of this income would be tax-free. The remaining 75% would count towards your taxable income.
- A full lump sum may be less tax efficient than moving your money into drawdown or taking a partial lump sum, as it may push you into a higher tax band. How much tax you pay depends on your individual circumstances.
- A full lump sum will count towards your lifetime allowance, doesn’t offer the guarantee of a death benefit and would affect how much you can continue to pay into a money purchase pension before you incur tax charges.
- A full lump sum from a defined contribution pension (also known as a money purchase pension) will trigger the Money Purchase Annual Allowance (MPPA). This will reduce the amount of tax-relievable contributions you can pay into money purchase pension schemes to £10,000 each year.
- Full lump sums count towards your lifetime allowance. If your total pension savings exceed the lifetime allowance, the amount over the lifetime allowance will be taxed/treated differently from the rest of your pension savings.
Is a full lump sum right for me?
Here are some things to think about if you’re considering taking a lump sum:
- What will you do if your money doesn’t last to the end of your lifetime?
- Do you have any other retirement income to rely on?
- Do you need all your money now? If not, is it worth taking the full sum now?
- Will taking the lump sum put you in a higher tax bracket? If it does, is this the best option for you?
- Doesn’t offer the guarantee of a death benefit, so do you have a partner or dependents that rely on you financially?
Taking time to consider these questions might help you decide if this is the best option for you.
Partial lump sum
Partial lump sums work in a similar way to full lump sums. The difference is that whatever you don’t withdraw remains in your pension pot to be invested and can continue to rise or fall in value over time.
- Like a full lump sum, up to 25% of the lump sum you take is tax-free, with the remaining 75% taxed as income. This could push you into a higher tax bracket, especially if you take it all in one year.
- Like a full lump sum, partial lump sums will count towards your lifetime allowance, don’t offer the guarantee of a death benefit, and would affect how much you can continue to pay into a money purchase pension before you incur tax charges.
Before taking a partial lump sum, you should consider how much you’ll need in retirement and if the money you have remaining will be sufficient.Before choosing a partial lump sum, you should consider the same factors as a full lump sum. This includes tax considerations, the MPPA and lifetime allowance, how long your money will last and any dependants who rely on you financially.
Small pots
Small pot lump sum rules help people with smaller pension pots make the most of their pension savings.
It lets you take an entire pension arrangement as a cash lump sum if it's worth £10,000 or less. You can do this a maximum of three times from personal pensions (the rules are difference for occupational pension schemes). This is because you can have up to three small pots, each to the value of up to £10,000 that don’t count towards your lifetime allowance
- As per other lump sum payments, you’ll receive 25% tax-free from each small pot, with the remaining 75% subject to income tax. As cash lump sums are classed as income, this may push you into a higher tax band.
- Unlike full and partial lump sums, taking a small pot lump sum won’t affect your annual or lifetime allowances. It’s useful if you want to take some money out while continuing to save and may help if your total retirement savings are near the limit of the lifetime allowance.
- Lump sums won’t provide an ongoing income and you should consider what other savings you have for retirement.
- A small pot lump sum won’t provide a regular income for any dependents after you die.
Choosing a flexible income
If you’d like flexibility with your pension income, a flexi-access drawdown arrangement could be for you. This lets you keep your money invested and allows you to take an income and, or withdraw lump sums from your pot as and when you need to.
How a flexi-access drawdown works
- Your money stays invested, and you choose investments to match your appetite to risk. If you'd like advice to help you choose appropriate investments, you should speak to a financial adviser. There may be a charge for this. If you don’t have a financial adviser you can find one at MoneyHelper.
- You have control to start, stop or vary your income.
- Normally, you can take 25% as a tax-free cash lump sum, with the remainder going into your flexi-access drawdown account.
- Regular income and one-off lump sums paid from your flexi-access drawdown are taxed as income. You may wish to monitor how much you drawdown in a year to avoid pushing into a higher tax band.
- You can continue to pay into the pension even when drawing down. However, taking income from a flexi-access drawdown account triggers the Money Purchase Annual Allowance (MPAA), so you will be limited on how much you can contribute to money purchase pensions without incurring a tax charge. Currently the MPAA is £10,000 per tax year.
- A flexi-access drawdown can pay death benefits from any remaining funds after your death.
Considerations of a flexi-access drawdown pension
- If you use a flexi-access drawdown account to access your pension, you need to take an active role in managing it. Unless it comes with a guarantee, you can’t be sure that your money will last to the end of your lifetime.
- As your money is still invested, the value can fall as well as rise and you could get back less than you initially invest.
- Flexi-access drawdown can be a more complex option – you may want to get financial advice before you apply, which there may be a cost for.
Investment Pathways
As flexi-access drawdown requires you to choose your own investments, the Financial Conduct Authority (FCA) has set out rules to help customers in drawdown who don’t have financial advisers to help them.
The FCA introduced four Investment Pathways, to help make your retirement choices simpler. These are four tailor-made options so you can select the type of fund best suited to your retirement needs. You can review this at any time and choose to switch funds without any penalties.
You can find out more about Investment Pathways in our Retiready FAQs.
For free and impartial guidance to help you understand what you can do with your pension pot visit Pension Wise, a service from MoneyHelper which is backed by the government. If you're over age 50 and hold a UK based defined contribution pension pot, you can arrange an appointment with Pension Wise - this can be face-to-face or by telephone. If you don't have a financial adviser, you can visit MoneyHelper to help you find one. A financial adviser will charge you for advice.
If you choose a flexi-access drawdown:
- The level of income is not guaranteed. Drawing income will reduce the value of your account. You may need to reduce your drawdown income in the future, in particular, if investment performance isn’t sufficient, or you live to a greater age than originally anticipated.
- The level of income you take will need to be reviewed regularly.
- The income you receive may be lower or higher than you could receive from an annuity, depending on the performance of your investments.
- The rules governing how much income you can take may change. This could mean income drawdown no longer meets your requirements.
- Options would be to withdraw the remaining amount, which would be taxable or buy an annuity. We would recommend seeking financial advice to identify what best suits your circumstances.
- Consider the amount of tax you'll have to pay on any regular income or one-off lump sum payments taken from your flexi-access drawdown account.
Annuities (guaranteed income)
You can receive a guaranteed income for life by buying an annuity with your pension savings. These are relatively straightforward to manage.
How an annuity works
- An annuity takes your pension savings and guarantees a regular income in retirement for a guaranteed period. This would guarantee the annuity would continue in the event of your death during that period. If you live longer than the guaranteed period, the annuity would continue to be paid until your death.
- How much you receive is dependent on a range of factors, such as age, postcode, current health and lifestyle.
- Annuities are taxed as income.
- An annuity doesn’t let you withdraw a lump sum once it’s set up, but you can choose to take up to 25% of your savings as tax-free cash before you set up the annuity.
- If you do add a death benefit or other extra features such as increasing income, your annuity may start with an initial reduced income.
Types of annuities
Annuities can be set up in different ways to meet your needs. If you add extra features, you may receive a reduced income. Here are some typical annuity options:
Single or joint life
A single life annuity pays an income for your life only. If you have a partner or dependant who will need an income if you die first, consider a joint life annuity. A joint life annuity can be paid to a named spouse or civil partner, an un-named spouse or civil partner, or a named financial dependent.
Level or escalating
A level annuity pays a fixed amount which doesn’t change. An escalating annuity starts lower and increases over time. Typically, it increases in line with either the Retail Prices Index (RPI), Consumer Prices Index (CPI), or at a fixed rate.
Enhanced or impaired-life annuities
Some providers offer enhanced or impaired life annuities. These pay a higher income than standard annuities based on certain health and lifestyle factors. It may provide a higher retirement income if, for example, you smoke regularly or have health problems which threaten to reduce your lifespan.
Annuities with a guarantee period
These annuities guarantee payments for a fixed period, even if you die before the period ends. For example, if you had a 10-year guarantee period but died after four years, income payments would continue to your dependents for a further six years. If you were to survive the guaranteed period, the annuity would continue until your death.
Considerations if considering taking an annuity
- Once your annuity is set up, you can’t change it. So, it’s important to think carefully about your needs and what the most suitable option is before committing.
- Annuity rates can change substantially and rapidly. There’s no guarantee that when you come to buy an annuity, that the rates will be favourable. This could mean your pension value and payments are less than you’d hoped for.
- If you’re not sure what sort of annuity you should get or whether it suits your need, consider talking to a financial adviser. There may be a cost for this.
Choose a combination of options
It’s possible to blend several withdrawal options to give you the exact amount of security and flexibility you need in retirement.
The options you can choose from include:
- Flexi-access drawdown
- Annuities
- Small pot lump sums
- Uncrystallised Funds Pension Lump Sum (UFPLS)
Uncrystallised Funds Pension Lump Sum is withdrawal of funds directly from your pension pot, provided you haven't accessed the pot in any other way, such as setting up drawdown, buying an annuity, or taking a tax-free lump sum of 25% of the pot.
- When you take a UFPLS from your pension, 25% is paid tax free and the remainder is taxed as ordinary income.
- If you choose a combination of options, remember that the considerations for each individual option will still apply. For example, any income from a flexi-access drawdown isn’t guaranteed, and annuity rates can change substantially and rapidly.
Which option could be right for you?
It’s up to you how you take your pension and it will depend on your individual circumstances. If you’re unsure, there are impartial resources available to help you feel more informed.