Pension freedoms explained

Pension freedoms offer you more options when it comes to taking and using the money saved in your pension, so it’s worth knowing what they mean for you and your retirement plans. 


What are pension freedoms?

You have a number of options when you take your benefits from your pension plan. 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 it (also known as pension drawdown) or buy a secure income (also known as an annuity). These will be subject to income tax.

Alternatively, you can take some or all of your benefits as a cash lump sum, with 25% being tax free and the rest subject to income tax. 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.

They initially came into force for pension savers from the age of 55, but this will rise to 57 from April 2028.

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 then 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.

Whichever option you choose, you should think carefully about how much money you take from your pension. The money needs to last the whole of your retirement, which might be longer than you think.


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.

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.

Lump sum calculator

If you’re taking a lump sum from your pension, this tool will help you understand how this might affect your tax and your future retirement income.

Income drawdown

Another option is to move your pension into a product called a drawdown pension. Royal London’s version of this product is called Income Release. 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 could fall or even run out 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.


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. Choosing to add these extra features will mean that the starting level of income will be lower.


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.

You'll find more details on how to book an appointment on the Pension Wise website, where you can also explore your pension options and get further guidance.


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 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 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 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.


Getting 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.

Our guide to financial advice can help you understand what to expect from a financial adviser, and how they might help you.