Your options since pension freedoms

Pension freedoms were introduced in 2015 to allow customers to flexibly access their 'DC' (defined contribution) pension pots. Initially, these freedoms came into force for pension savers from the age of 55, but from April 2028, this will rise to 57.

The changes allow more flexibility when it comes to using your pension savings - allowing you to access a cash lump sum, draw on your money as you need it (pension drawdown), or buy a secure income (sometimes called an annuity). You might also choose to do a combination of those things.

Pension freedoms only applies to ‘Defined Contribution’ or ‘Money Purchase’ pensions, also known as Personal Pensions and Stakeholder Pensions. This is where your contributions are used to build up your pension savings and you choose how and when you want your income. Pension freedoms doesn’t include ‘Defined Benefit’ pensions. These are different, as the amount of income you receive, is linked to your salary and length of service.

The money you've saved over the course of your life will need to last for the whole of your retirement. You should think carefully about how much money you take from your pension savings and how long it might need to last.

Your options

Pension freedoms introduced a number of new changes and options. Alongside the existing option to take a quarter (25%) of your pension pot as a tax-free lump sum, you can now use your pension savings to buy a retirement product. Or you can choose to do a combination of these things. You might also choose to take it all as cash.

You just need to remember to make your decisions wisely as this money has to last your whole retirement. And that could be longer than you think.

Withdraw your pension pot as cash

You can now take your pension pot as cash in one go or as a series of lump sums. A quarter (25%) will be tax-free but the remaining three-quarters (75%) will be subject to income tax. So, if you take your pension in the same tax year as you’ve received a salary, or other income, then you may be pushed into a higher income tax bracket and have to pay more tax.

If you’re thinking about taking your pension pot as cash use a tax calculator to see how much tax you'll have to pay. Our guide to how your pension is taxed will give you more information about this.

If you want to use your pension pot to pay off a mortgage or clear debts, you should seek financial advice. A financial adviser will help you find the best solution for your circumstances.

Income drawdown

You can move your pension pot into a product called a drawdown pension. We call this product Income Release. It lets you take an income from your pension pot whilst it remains invested. The income isn’t normally guaranteed but there are no limits on the amount you can take as income from your invested funds. Drawdown income is subject to income tax.

Your retirement income could fall or even run out if you take too much too soon and start eating into the money you originally invested to produce the income – especially if stock markets fall.

A secure income

When you reach age 55, rising to 57 from April 2028, you can use your retirement savings to buy a secure income, also called an annuity.

This will pay you a regular fixed sum of money that will last for the rest of your life. You can choose to add extra features, such as yearly increases to your income, or making sure your income can be passed on when you die.

Once your secure income is set up you won’t be able to add extra features or cash in your plan.

Free guidance for everyone

Before making any final decision on what to do with your pension pot, you can book an appointment with Pension Wise from MoneyHelper.

Pension Wise from MoneyHelper

Pension Wise from MoneyHelper is a free and impartial service, set up by government, which can help you understand:

  • the right things to think about when considering your choices, such as your plans to continue working, your personal and financial circumstances, and leaving money after you die;
  • the different options for taking your pension pot, and the potential advantages and disadvantages of each;
  • the tax implications of each choice.

They offer telephone or face-to-face appointments with highly trained professionals. Appointments are available and it’s easy to book one.

You'll find more details on the Pension Wise from MoneyHelper website. You can also use the Pension Wise from MoneyHelper website to explore your pension options.

Preparing for your appointment

Before you use the service

To make the most of a Pension Wise from MoneyHelper appointment it would be useful for you to have:

  • The value of your pension pot(s) and whether there are any guarantees or special features that apply to it. If you've got more than one pension pot, remember to gather this information on each of them. If you’ve lost track of a pension, you can try and find it through the pension tracing service. You can contact them online or by phoning 0800 1223 170.
  • An estimate of how much state pension you may get and when. The government has tools on their website you can use to check how much state pension you could get and find out your state pension age.
  • Notes on your financial circumstances, like your monthly income and expenditure, any savings or debts and the value of any state benefits you’re currently receiving. For help in working out your detailed spending breakdown, use the Money Advice Service’s budget planner.

You'll also be asked about any medical or health conditions that may affect your life expectancy, as they could result in you getting a higher income in retirement.

After your Pension Wise from MoneyHelper appointment

If you’re thinking of buying a retirement income product then it’s essential that you shop around to compare what we can offer you against what other pension providers can offer. By shopping around you could get a higher income than we can offer or a type of income that is more suitable for your needs. This isn't always the case but we strongly recommend that you shop around before you buy.

Regulated Financial Advice

Pension Wise from MoneyHelper won’t provide advice or recommend specific products or providers. If you feel you need a personal recommendation, or if the prospect of shopping around yourself feels too daunting, you should talk to a regulated financial adviser.

Financial advisers are qualified professionals who will only recommend which course of action is right for you after taking account of your overall financial and personal circumstances. They are regulated by the Financial Conduct Authority (FCA) and must follow their rules. If the advice they give you turns out to be unsuitable you can make a complaint to the Financial Ombudsman Service.

Independent or restricted advice

Independent financial advisers look at all financial product types and all providers. Financial advisers offering ‘restricted advice’ specialise in certain product types and/or restrict how many providers’ products they look at.

For the widest choice of retirement income products, you ideally want an adviser who can recommend products from the whole of the market they are advising on.

What does it cost?

A financial adviser will charge either a percentage of your pension pot, a charge per hour or a fixed fee. You can pay up front or have the fee deducted from your pension pot after any tax-free amount is withdrawn. Most offer an initial meeting for free.

Advisers should always give you an estimate of how much their service will cost before you commit yourself.

Finding a regulated financial adviser

If you don’t have a financial adviser, you can use our online tool to find one. Advisers may charge for providing advice and should agree any fees with you upfront.