Pension options: what can I do with my pension pot?

What can I do with my pension pot?

You can't take money from your pension until you're at least 55 (rising to 57 in 2028), but you can do so at any point after that. 

You have several options for accessing the money in your defined contribution pension(s).

You can take up to 25% of your pot tax-free (up to a maximum of £268,275), and then access the rest of the money using any combination of the following:

• Buy an annuity
• Keep it invested and take income when you need (pension drawdown)
• Take some or all of it as cash

Should I buy an annuity?

Buying an annuity involves swapping some or all of your retirement savings for regular guaranteed payments that last for the rest of your life. 

Once you've bought an annuity, you can't reverse the decision.

Likely to suit you if…

• you want a guaranteed income throughout retirement
• you don't want your retirement income to be subject to stock market fluctuations
• you want the option for your income to rise with inflation (although this is more expensive than 'level' annuities that pay a fixed amount)

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Should I use pension drawdown?

After you've taken your 25% tax-free lump sum, you can move some or all of the remaining money into a drawdown pot. 

Pension drawdown allows you to keep your pension invested, and draw out income as and when you wish. You can take out as much as you want, although this money will be subject to income tax, so you'll need to take that into account.

If you die before 75, your beneficiaries can access any money remaining in your drawdown plan tax-free. If you're over 75 when you die, the money you pass on will be taxed as income. 

Any money left in your pension or drawdown plan when you die is currently exempt from inheritance tax, but that is set to change. From April 2027, this money will be added to the rest of your estate, meaning that it could be subject to inheritance tax if the total value of your estate exceeds the tax-free allowance. 

Likely to suit you if…

• you want your money to continue to be invested
• you want the flexibility to take money out as and when you want
• you want to be able to pass on any remaining money to loved ones

Should I take lump sums?

You can leave the money in your pension and take out lump sums when you need to (or even take the whole pot in one go).

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.

With each lump sum you take, 25% will be tax-free (up to a maximum of £268,275), and the rest is treated as income and taxed in the same way.

For example, if you take a £20,000 lump sum, £5,000 of this would be tax-free and £15,000 would be treated as income. 

If you don't have any other sources of income, the first £12,570 (your personal allowance) will be tax-free, meaning the remaining £2,430 will be taxable. 

Likely to suit you if…

• you have a small pension pot
• you haven't yet decided how to access the rest of your pot
• you want to spread your 25% tax-free allowance over time

Can I still pay into a pension if I've already accessed it?

If you're under 75, you can continue to save into a pension and get tax relief, even if you've already started taking money from it.

There is a cap on the amount you can save into a pension each year while still benefitting from tax relief, known as the annual allowance. This is set at £60,000, or 100% of your income if you earn less than £60,000.

However, this limit falls to £10,000 a year (known as the money purchase annual allowance or MPAA) once you access your pension via UFPLS or drawdown.

What if I've got a final salary pension?

If you have a defined benefit pension (also known as a final salary pension) you won't need to make a decision about how to access your money as you will receive a guaranteed income for the rest of your life. This is either based on your ‘career average’ earnings, or your final salary. 

Depending on your scheme, you may have the option to transfer your savings to a defined contribution scheme (as long as you're not already receiving payments). But you're usually better off leaving your money where it is.