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What can I do with my pension pot?

Pension freedoms in 2015 fundamentally changed the rules for cashing in your pensions. Understand the pros and cons of the main pension options.

In this article
What are my pension options? Should I buy an annuity? Should I use pension drawdown? Should I cash in my pension?
Should I take lump sums? What if I've got a final salary pension? Your pension queries answered

What are my pension options?

Our table compares the options for turning a defined contribution pension pot into retirement income.

This common type of pension is where you've paid in a regular amount but income isn't guaranteed (unlike with a final salary pension). 

Pension option Tax-free
cash?

Regular
income?

Guaranteed
income?
Can I run out
of money?
Will my tax
rate go up?
An annuity Up to 25%
of fund
Yes Yes No Unlikely as plan
income in advance
Flexi-access
drawdown
Up to 25%
of fund
Yes No Yes Unlikely as plan
income in advance
Take the whole pot Up to 25%
of fund
No No Yes Likely
Take lump sums 25% of each
withdrawal
No No Yes Depends on size
of lump sums

So which option is likely to suit you? We give some more guidance below.

Should I buy an annuity?

Background:

An annuity was the main way that people funded their retirement in the past if they had a personal or workplace (defined contribution) pension. 

Traditionally, people would buy an annuity with their DC pension savings and it would pay a guaranteed income for the rest of their life.

The 2015 rules meant that you no longer had to do this - you can access all of your pension savings from age 55 and do whatever you like with them.

Likely to suit you if…

  • you want a guaranteed income for the rest of your life
  • you don’t want your retirement income to be subject to stock market fluctuations
  • you want your income to rise with inflation.

See our page on annuities for more.

 

Should I use pension drawdown?

Background:

Income or pension drawdown has emerged as the most popular option for many retirees when they convert or access their defined contribution pensions. 

Drawdown allows you to keep your pension fund invested in the stock market, and draw out income as and when you wish. You can take out as much as you want each year (subject to taxation).

The drawdown rules changed in 2015 to allow beneficiaries to take a lump sum or income tax-free if you die before 75 and at their marginal rate if you die after 75.

Likely to suit you if…

  • you want your money to continue to be invested
  • you want the flexibility to take sums out as and when you want
  • you want to take out different amounts each year.

See our page on flexi-access drawdown for more.

Should I cash in my pension?

Background:

As a major part of the 2015 pension rules changes, it became possible to take your entire pension fund in one go as cash for you to spend as you wish.

You can do this from the age of 55. However, there are considerable tax implications to consider before going for this option.

To do this, you can close you pension pot and take your fund as cash. The first 25% 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 may be charges for cashing in your whole fund, and not all pension schemes, particular workplace pensions, or providers will offer this option.

Likely to suit you if…

  • you need to get your hands on the money quickly
  • you’ve suffered from poor health and a guaranteed income for life might not be the best option
  • you want to reinvest your money or have quick access to it.

See our page on taking the entire fund for more.

Should I take lump sums?

Background:

The 2015 pension changes also introduced a new, flexible way to take money out of your retirement savings. You leave the money in your current pension fund and take out lump sums when you need to.

The technical term for this is uncrystallised funds pension lump sums (UFPLS). This just means that you haven't 'crystallised' your pension pot by turning it into an income. 

It's similar to using your pension like a savings account, taking cash out when you need, with the rest continuing to grow.

Each withdrawal is 25% tax-free, with the rest charged at your normal income tax rate when your other income is taken into account.

Likely to suit you if…

  • you want to take varying amounts of money each time
  • you want to spread your 25% tax-free allowance over a period of time
  • you don’t want to expose your pension to investment risk.

See our page on taking lump sums for more.

What if I've got a final salary pension?

People with a private final salary (eg defined benefit) scheme or a funded public final salary scheme are able to take advantage of the 2015 rules by transferring their money into a defined contribution pension.

However, you could lose valuable benefits by doing this, including a guaranteed income which is linked to inflation.

You have to receive the appropriate independent advice if you want to transfer from a defined benefit to a defined contribution scheme (and your pot is worth more than £30,000).

Your pension queries answered

The Which? Money Helpline offers independent tailored guidance on a wide range of topics, including pensions and retirement.

If you're not a Which? member and would like to get unlimited access to our Money Helpline experts, you can try Which? Money for one month for £1.

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