Options for using your pension pot

You now have more choice and flexibility than ever before

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. It’s important to take your time to understand your options and seek professional financial advice, as what you decide now will affect your retirement income for the rest of your life.

Taking your pension from April 2015
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 (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.

Your options at a glance

Leave your pension pot untouched
You may 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.

Use your pot to buy a guaranteed income for life – an annuity
You can choose to take up to 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’. 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 dependant or other beneficiary after you die.

Use your pot to provide a flexible retirement income – flexi-access drawdown With this option, you take up to 25% 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 may 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.

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, the first 25% is tax-free and the rest counts as taxable income. There may 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.

Take your whole pot as cash
You could close your pension pot and take the whole amount as cash in one go if you wish. 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 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 obtain professional financial advice before cashing in your entire pot.

Option combinations
You don’t have to choose one option when deciding how to access your pension – you can opt for a combination, 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.