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What are pension freedoms?
You have several options for taking money from your pension savings. You can usually choose to take a quarter (25%) of your pension pot as a tax-free lump sum. You can make withdrawals from the balance as you need (also known as pension drawdown or Flexible access, and we call this Income Release) or buy a secure income (also known as an annuity). These will be subject to income tax.
Alternatively, you can take some or all your benefits as a cash lump sum, with 25% being tax free. Or you can choose to do a combination of these things.
Pension freedoms were introduced in 2015 and apply to anyone who has a Defined Contribution (DC) workplace pension today. The freedoms allow you to flexibly access the money saved in your DC pension plan.
Pension freedoms initially applied to savers from age 55. From April 2028, this will increase to age 57.
What is a Defined Contribution pension?
Pension freedoms only apply to defined contribution pensions. This is where your contributions are used to build up your pension savings, and you choose how and when you access your money.
The freedoms don’t apply to Defined Benefit (DB) pensions. These are a different type of workplace pension, as the amount of income you receive is linked to your salary and length of service.
Whatever option you choose, think about how much money you’ll need to make your pension last throughout retirement. Your pension savings need to last throughout your retirement, which could be longer than expected.
Withdraw money from your pension as cash
You can now take your pension pot as cash in one go or as a series of lump sums. The first 25% will be tax-free but the remaining 75% will be subject to income tax.
When taking money from the remaining 75%, you may be pushed into a higher income tax bracket if you also earned money from a salary or other income. This means you may need to pay more tax.
Thinking about taking your pension savings as cash? Use our calculator to see how much tax you’ll pay. Our guide to how your pension is taxed has more information about this.
If you are considering using your pension to pay off a mortgage or other financial commitments, then you should seek financial advice. If you don’t have a financial adviser, we can help you find one. Advisers may charge for their services, though they should agree any fees with you upfront.
Pension drawdown
Another option is to move your pension into a product called a pension drawdown. Royal London’s version of this product is called Income Release and you may see it referred to as Flexible access. It lets you take an income from your pension while the rest is invested, so it still has a chance to potentially grow over time. Depending on how much drawdown income you take, it may be subject to income tax. As it remains invested, the value can fall as well as rise.
It’s worth remembering that your retirement income may decrease or be used up if you take too much from your pension too soon. This could start eating into the money you originally invested to produce the income, especially if stock markets
fall.
Remember, investment returns are never guaranteed. So, while your investment could grow, its value can also go down. This means you could get back less than you put into your plan.
Buy an annuity (secure income)
When you reach age 55 (rising to 57 from April 2028) you can use money saved in your pension to buy a secure income, also known as an annuity.
A secure income will pay you a regular fixed sum of money that lasts 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. But remember that adding these features lowers your starting income.
Free pension guidance for everyone
Before making any final decision on how to access the money in your pension, you can book an appointment with Pension Wise by MoneyHelper to better understand your options.
It’s a free and impartial service set up by government, which can help you understand:
- What to think about when considering your choices, such as your plans to continue working, your personal and financial circumstances, and who to leave money to after you die.
- The different options for taking your pension pot, including their pros and cons.
- The tax implications of each choice.
Pension Wise offers telephone or face-to-face appointments with highly trained professionals. Visit the Pension Wise website to book your appointment and explore your options.
Preparing for your appointment
It will be useful for you to have certain details to hand before your Pension Wise appointment, such as:
- The value of your pension plan(s) and whether there are any guarantees or special features applied. If you've got more than one pension, remember to confirm this information for each of them. If you’ve lost track of a pension, you can try and find it through the pension tracing service.
- An estimate of how much state pension you may get and when. The government provides tools to check your state pension amount and pension age.
- Notes on your financial circumstances, like your monthly income and outgoings, any savings or debts, and the value of any state benefits you’re currently receiving. For help in working out your detailed spending breakdown,
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 important to shop around and see what we and other pension providers can offer. By comparing options, you might find an income that gives you more financial freedom or better suits your lifestyle. While this may not always be the case, we encourage you to explore alternatives before deciding.
Getting financial advice
Pension Wise is a guidance service, not an advice service, so it won’t provide personal recommendations or suggest specific products or providers. If you feel you need a personal recommendation, or if you find comparing options challenging, you should talk to a 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.
Check out our guide to financial advice to see how a financial adviser can help you and what to expect.