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What are pension freedoms?
Pension freedoms give you more choice over how you take money from your Defined Contribution (DC) pension plan.
Your options when you take your pension benefits
When you’re ready to take money from your pension plan, you have a few ways to do it.
- Take a tax-free lump sum (optional)
You can take up to 25% of your pension pot tax‑free if you want to - but you don’t have to. - Choose how to take the rest of your pot
After that, you can choose one or more of these options:
- Flexible withdrawals (pension drawdown): the rest stays invested and you take money as and when you need it.
- A guaranteed income (an annuity): you buy a secure income, either for life or a fixed period.
- Cash lump sums: take some or all your pot as cash
Each option affects tax differently. Make sure you understand how your choice could change your tax position for the year.
Mixing your options
You can use a combination of these options, depending on what you need.
Who pension freedoms apply to
Pension freedoms were introduced in 2015. They apply to anyone with a Defined Contribution (DC) workplace pension. The freedoms give you flexible access to the money saved in your DC pension plan.
When you can use pension freedoms
You can normally start using pension freedoms from age 55. This minimum age will rise to 57 from April 2028.
What is a Defined Benefit pension?
Pension freedoms don’t apply to Defined Benefit (DB) pensions.
DB pensions used to be more common, but most workplace pensions today are Defined Contribution (DC).
A DB pension works differently because the income you receive is based on your salary and how long you were a member of the scheme. The scheme decides the amount you’ll get, rather than it being based on the value of your pension savings.
If you’re not sure whether you have a DB pension, it’s a good idea to contact your pension provider or speak to a financial adviser. They can help you understand what type of pension you have and what that means for your options.
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 you take money from the remaining 75%, it’s added to your other taxable income for the year.
This could include things like your salary, rental income or other savings.
Because all of this is added together, you may move into a higher income tax bracket and pay more tax.
If you’re thinking about taking your pension pot as cash, you can use a tax calculator to see how much tax you'll have to pay. Our guide to how your pension is taxed has more information about this.
Lastly, if you want to use money in your pension to pay off a mortgage or debts, then you should seek financial advice. A financial adviser will be able to recommend a solution for your individual circumstances.
Pension drawdown
Another way to take money from your pension is through a drawdown product. At Royal London, this is called Income Release. Income Release lets you take an income from your pension while keeping the rest invested. This means your remaining pot still has the chance to grow, although its value can fall as well as rise.
Any income you take after your tax-free amount is used will normally be taxed as income.
What to keep in mind
Your pension savings need to last throughout your retirement. If you take too much money too quickly, your income could reduce or even run out.
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, 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 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.
Tax treatment depends on where you live in the UK and your individual circumstances. Tax rules may change in the future.