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You don’t have to give up work or be retired before you can take money out of your defined contribution pension. That’s the type of pension that pension providers offer to you individually as a personal pension or through your job as a workplace pension. These are pensions where you build up a pot of money.
This article will look at the options available for defined contribution pensions, but it won’t cover State Pension or defined benefit pensions.
When can you access your pension savings?
If you are 55 or over (this is increasing to 57 on 6 April 2028) then you can take money out of your pension. Some people might be able to access their pension money earlier perhaps because of the type of job they do or because of ill health but most people have to be 55.
Ways to withdraw money from my pension
Do nothing
Even if you've reached the age at which you originally thought you might retire, continuing to work and earn may now seem more appealing. You'll continue to have a structure to your life, see friends and colleagues and, importantly, earn an income to live on.
The longer you can leave your pension pot untouched, the longer it has to grow, free of tax, potentially giving you more income when you do eventually decide to reduce your work hours or stop working altogether.
And, if you die without touching your pension pot, it can be passed on, free of tax, to a loved one. More information on this can be found in our guide on pension death benefits.
Buy an annuity
Until April 2015, most people used their pension fund to buy an annuity – a contract that provides a guaranteed income for life. For many people who want the certainty of a regular income, an annuity is still a good choice. You use the money in your pension pot to buy this guaranteed income. The advantage is that as long as you live, it'll pay out an agreed amount of cash everyone, three, six or 12 months. Income tax is paid at your normal rate.
You can take your 25% tax-free cash and use the other 75% to buy an annuity or use the whole amount to buy an annuity. If you suffer from a medical condition that could shorten your life, you're likely to be entitled to a larger income.
If you pay extra, which means you’ll have less annual income, you can also choose to have the annuity income increase in line by a fixed percentage every year, or in line with inflation, and for the income to continue to be paid to your husband, wife, civil partner or partner after your death until their death. You can also choose to have a guarantee period. This means that if you die within a certain time, for example 5 years of buying the annuity then your beneficiaries will still receive some money. The main disadvantages of annuities are that they are inflexible so you can’t take more money out if you need it and unless you have paid for a guarantee or you spouse to receive an annuity, it ends on your death.
Income Drawdown
Putting your pension into ‘drawdown’ allows you to take 25% of each amount you move into drawdown as tax-free cash. The rest can be left invested for you to use draw out when you need it, subject to tax at your normal rate. You can take a regular amount every month or you can take larger sums every now and then. Drawdown is very flexible. If you die, then the money left can be passed onto your beneficiaries. More information on this can be found in our guide on pension death benefits.
If you only take tax-free cash and move the rest into drawdown then you won’t trigger the Money Purchase Annual Allowance, and you can save more into pensions. But you will trigger this if you even take £1 of drawdown income.
However, you are responsible for making sure that your drawdown fund lasts for the rest of your life.
Taking cash lump sums
Finally, you can and take lump sums of cash out of your pension pot as and when you need them. The technical term for this is ‘uncrystallised funds lump sums’ or UFPLS. Each withdrawal is 25% tax free, while the other 75% is subject to tax at your normal income tax rate. You can take as many cash lump sums as you want. If you die, then the money left can be passed onto your beneficiaries. More information on this can be found in our guide on pension death benefits.
As with drawdown, you are responsible for making sure that you have enough money to last for the rest of your life. If you only want tax-free cash, for example because you are still working, this might not be a good idea as 75% is taxable. Any payment that you take out as a cash lump sum will trigger the Money Purchase Annual Allowance. More information is available in our pensions and tax guide.
Take a mix of different options
You can choose a mixture of different options. You might want to go into drawdown at age 60 but then buy an annuity with what’s left when you are 75 so that you know it will last for the rest of your life. Or you might buy an annuity to cover essential spending like bills and then move the rest into drawdown.
