Guide to pension freedoms

The pension freedoms, introduced by the government in 2015, lets people aged 55 and over access their ‘Defined Contribution’ or ‘Money Purchase’ pension pot in whatever way they want.

The biggest change is that people aged 55 and over can withdraw the whole of their pension pot as one lump sum.

Money purchase pensions include Personal Pensions and Stakeholder Pensions. Your contributions are used to build up a pot of money and you choose how and when you want to use that pot. They don't include ‘Defined Benefit’ pensions, where the amount of income you receive is linked to your salary and length of service.

But with greater freedom comes greater responsibility. You need to make sure you have enough to live on throughout your retirement, and that you can provide for any dependants after you die.


Free guidance for everyone

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

Pension Wise

Pension Wise 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 website. You can also use the Pension Wise website to explore your pension options.

Preparing for your appointment

Before you use the service

To make the most of a Pension Wise 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 Government’s Pension Tracing Service. You can contact them online or by phoning 0800 731 0193.
  • 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 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 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.

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.

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. For more information on taxation, read our guide to how your pension is taxed.

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.

Lower taxation on death benefits

If you die before age 75, we'll pay your pension pot tax-free provided it's paid within 2 years of the date we become aware of your death. If it’s paid after the two year limit, we add the money to your beneficiary’s other income and tax it at the appropriate rate.

If you die after age 75, when the money is taken out (lump sum or income) it's added to the beneficiary’s other income and taxed at the appropriate rate. If the beneficiary is not an individual (for example a company or a trust), any lump sum will be taxed at 45%.

Income drawdown limits removed

You can move your pension pot into a product called a drawdown pension. A drawdown pension 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.