Options for using your pension pot

Money Advice Service

Following changes introduced in April 2015 you now have more choice and flexibility than ever before over how and when you can take money from your pension pot. Take your time to understand your options, and get help and advice – what you decide now will affect your retirement income for the rest of your life.

Taking your pension from April 2015

Did you know?

You must have reached normal minimum pension age to access your pension pot – currently 55 (or earlier if you’re in ill health or if you have a protected retirement age).

Changes introduced from April 2015 give you freedom over how you can use your pension pot(s) if you’re 55 or over and have a pension based on how much has been paid into your pot (known as a defined contribution scheme).

Whether you plan to retire fully, to cut back your hours gradually or to carry on working for longer, you can now tailor when and how you use your pension – and when you stop saving into it – to fit with your particular retirement journey.

There’s a lot to weigh up when working out which option or combination will provide you and any dependants with a reliable and tax-efficient income throughout your retirement.

Be sure to use the free, government-backed Pension Wise service to help you understand your options or get financial advice – see the later section ‘Get help or advice’.

Your options at a glance

What is a pension pot?

‘Pension pot’ refers to a type of pension you build up with pension contributions you and/or your employer make. You’ll have one if you have a ‘defined contribution’ pension which includes workplace, personal and stakeholder pension schemes.

Under the new flexible rules you can mix and match any of the options below, using different parts of one pension pot or using separate or combined pots.

There are summaries of the options below. Follow the links in each section to read the full details on each option, including the benefits, potential risks and tax implications.

Not all pension schemes and providers will offer every option – even if yours does, be sure to shop around.

Find out more about pensions in our Pensions and retirement section.

Leave your pension pot untouched

You might be able to delay taking your pension until a later date.

Your pot then continues to grow tax-free, potentially providing more income once you access it.

For an overview of the potential benefits and things to look out for if considering delaying see our guide Delaying taking your pension pot

Use your pot to buy a guaranteed income for life – an annuity

You can normally withdraw up to a quarter (25%) of your pot as a one-off tax-free lump sum then convert the rest into a taxable income for life called an annuity. Some older policies may allow you to take more than 25% as tax-free cash – check with your pension provider. There are different lifetime annuity options and features to choose from that affect how much income you would get.

You can also choose to provide an income for life for a dependent or other beneficiary after you die.

Use your pot to provide a flexible retirement income – pension drawdown

With this option you can normally take up to 25% (a quarter) of your pension pot, or of the amount you allocate for drawdown, as a tax-free lump sum, then re-invest the rest into funds designed to provide you with a regular taxable income.

You set the income you want, though this might be adjusted periodically depending on the performance of your investments.

Unlike with a lifetime annuity your income isn’t guaranteed for life – so you need to manage your investments carefully.

Find out more in our guide flexible income products – pension drawdown.

Take small cash sums from your pot

You can use your existing pension pot to take cash as and when you need it and leave the rest untouched where it can continue to grow tax-free.

For each cash withdrawal, normally the first 25% (quarter) is tax-free and the rest counts as taxable income.

There might be charges each time you make a cash withdrawal and/or limits on how many withdrawals you can make each year.

With this option your pension pot isn’t re-invested into new funds specifically chosen to pay you a regular income and it won’t provide for a dependant after you die.

There are also more tax implications to consider than with the previous two options.

Find out more in our guide Taking small cash sums from your pension pot.

Take your whole pot as cash

Did you know?

Cashing in your pension pot will not give you a secure retirement income. Get guidance from Pension Wise followed by financial advice before you commit.

You could close your pension pot and take the whole amount as cash in one go if you wish.

Normally, the first 25% (quarter) will be tax-free and the rest will be taxed at your highest tax rate – by adding it to the rest of your income.

There are many risks associated with cashing in your whole pot.

For example, it’s highly likely that you’ll be landed with a large tax bill, it won’t pay you or any dependant a regular income and, without very careful planning, you could run out of money and have nothing to live on in retirement.

Be sure to get financial advice before cashing in your whole pot.

To find out more and understand the risks associated with this option see Taking your whole pension pot as cash.

Mixing your options

You don’t have to choose one option when deciding how to access your pension – you can mix and match as you like, and take cash and income at different times to suit your needs.

You can also keep saving into a pension if you wish, and get tax relief up to age 75.

Which option or combination is right for you will depend on:

  • your age and health
  • when you stop or reduce your work
  • whether you have financial dependents
  • your income objectives and attitude to risk
  • the size of your pension pot and other savings
  • whether your circumstanes are likely to change in the future
  • any pension or other savings your spouse or partner has, if relevant.

You’ll be talked through all of the options at your free Pension Wise appointment.

Get help or advice

To find out more information about your options see our Retirement income options tool.

If you’re 50 or over and thinking of taking all or part of your pension, you can use Pension Wise, a free government backed service, to help you understand all of the choices you have.

It’s an impartial service available online, on the phone and face-to-face.

Find out about all of your options and how to book an appointment at the Pension Wise website.

Once you understand your choices, we recommend you speak to a financial adviser who will be able to recommend which option (or combination) is best for you and help find you the most competitive products.

You can find FCA registered financial advisers who specialise in retirement planning in our Retirement adviser directory.

Find out more about pensions in our Pensions and retirement section.

This article is provided by the Money Advice Service.

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Key things to remember when using Rest Less Money:

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Accuracy of Information – We try to make sure that all the information provided on Rest Less Money is correct at the time of publishing as we want it to be the most helpful resource possible. Sadly, we are not perfect however, and so we can make no guarantees as to the completeness, accuracy, adequacy or suitability of the information available on the site.
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We hope you find Rest Less Money a useful resource and we would welcome your feedback at [email protected] on how to make it even better. For more information on any of the above you can read our full terms and conditions.

Some important information about Rest Less Money

We want you to understand the positives, but also the limitations of using our site. We operate in a journalistic manner and therefore all information, guidance or suggestions provided are intended to be general in nature, and you should not rely on any of the information on the site in connection with the making of any financial decision.

When we set out to build Rest Less Money, we wanted to be a trusted place where you could find helpful information about financial matters affecting the over 50s. As a free to use resource, we try hard to provide the best information we can, but we cannot guarantee that we won’t occasionally make mistakes. So please note that you use the information on our site at your own risk, and we can’t accept liability if things go wrong.

Key things to remember when using Rest Less Money:

We do not offer financial advice – As a journalistic site, it’s important to know that we do not provide financial advice. You should always do your own research before choosing any financial product so that you can be certain it is right for you and your specific circumstances. If you are in any doubt, please seek professional financial advice from a regulated financial advisor.

No Liability – please note that you use the information on Rest Less Money at your own risk and we can’t accept liability for how you choose to use the information given on our site. We will often provide links to content or products and services available on other third-party websites. These are provided purely for your convenience and we cannot be held responsible for any content, or any of the products and services offered on any website that we link to.

 

Accuracy of Information – We try to make sure that all the information provided on Rest Less Money is correct at the time of publishing as we want it to be the most helpful resource possible. Sadly, we are not perfect however, and so we can make no guarantees as to the completeness, accuracy, adequacy or suitability of the information available on the site.
Whilst we work hard to try and provide accurate information, deals and prices can change, so whilst they may be correct at the time of writing, providers may subsequently decide to alter them later – so always double check first.

A final note on the Rest Less Community Forums – always remember that anyone can post their opinion on the Rest Less Community Forums, so it can be very different from our own opinion and may not be factual or well researched. Always be wary of any content posted on the forums and be sure to do your own research and due diligence on anything suggested. 

We hope you find Rest Less Money a useful resource and we would welcome your feedback at [email protected] on how to make it even better. For more information on any of the above you can read our full terms and conditions.

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