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Options for using your defined contribution pension pot

You now have more choice and flexibility in how and when you can take money from your defined contribution pension pot. It’s important to understand your options because what you decide now will affect your retirement income for the rest of your life. 

What is a defined contribution pension pot?

It’s a type of pension you build up with pension contributions you and/or your employer make.

This includes workplace, personal and stakeholder pension schemes.

You must have reached normal minimum pension age to access your pension pot. This is currently 55 or earlier if you’re in ill health or have a protected retirement age. This will rise to age 57 from April 2028.

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 you can decide when to stop saving into it – to fit with your retirement plans.

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.

It’s important to use the free, government-backed Pension Wise service to help you understand your options.

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Accessing your defined contribution pension pot – your options

You can mix and match any of the options listed below, using different parts of one pension pot or using separate or combined pots.

Not all pension schemes and providers will offer every option even if yours does, make sure you shop around.

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Leaving your pension pot untouched

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

Your pension pot can continue to grow tax-free until you need it. This will potentially provide you with more income when you start taking money out.

If you want to build up your pension pot more, you can continue to get tax relief on:

  • pension savings of up to £40,000 a year, or
  • 100% of your earnings if you earn less than £40,000, until age 75.

This is known as the annual allowance. If you’re a high earner or you have taken money from a pension pot already, you might have a lower allowance.

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

An annuity provides you with a regular guaranteed income in retirement.

You can buy an annuity with some or all your pension pot. It pays income either for life or for an agreed number of years.

When you use money from your pension pot to buy an annuity, you can normally take up to 25% of the amount as tax-free cash.

You can then use the rest to buy the annuity – and the income you get is taxed as earnings.

Annuities are sold by insurance companies.

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

Pension drawdown – or flexi-access drawdown – is a way of taking money out of your pension pot to live on in retirement.

It can give you more control and flexibility over how and when you get your pension money.

You can normally take up to 25% of the pot as a tax-free lump sum. The rest remains invested, giving it the potential for investment growth.

You can then decide if you want a regular income, or you might take amounts as and when you want them.

The value of your invested pot can go down as well as up, which means the income isn’t guaranteed.

Taking small lump sums from your pot

You can leave your money in your pension pot and take lump sums from it when you need to. You can do this until your money runs out or you choose another option.

This option is also known as Uncrystallised Funds Pension Lump Sum (UFPLS)

Each time you take a lump sum of money, 25% is tax-free. The rest will be taxed as earnings.

The remaining pension pot stays invested. This means the fund value and future withdrawals aren’t guaranteed.

Keeping the fund invested creates the potential for growth, but investments can go up or down.

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

Taking your whole pot as a lump sum

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

But be aware that withdrawing all the money in your pension pot won’t give you a secure retirement income.

Normally, the first 25% will be tax-free. The rest will be taxed as earnings.

There are many risks associated with withdrawing your whole pot.

For example, it’s highly likely that you’ll be landed with a large tax bill. Plus, it won’t pay you or any dependant a regular income.

Without very careful planning, you could run out of money and have nothing to live on in retirement.

If you’re thinking of doing this, get free guidance from the government’s Pension Wise.

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Mixing your options

You don’t have to choose one option when deciding how to take money from your pension.

Mixing your options can give you flexibility to suit different needs at different times during your retirement.

For example, you could use one option at the beginning of your retirement – such as flexible retirement income. And you can use another option later – such as an annuity to get a guaranteed income.

If you have a large pot, you might be able to split it to provide some guaranteed income and leave some invested.

If you have more than one pension pot, you might choose different options for each pot.

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

Some providers offer products that mix two or more options. 

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When you understand your choices, you might want to speak to a financial adviser who can recommend which option – or combination – is best for you. They can also help find you the most competitive products.

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Looking for us? Now, we’re MoneyHelper

MoneyHelper is the new, easy way to get clear, free,
impartial help for all your money and pension choices.
Whatever your circumstances or plans, move forward with MoneyHelper.

Continue to website
Looking for us? Now, we’re MoneyHelper

MoneyHelper is the new, easy way to get clear, free,
impartial help for all your money and pension choices.
Whatever your circumstances or plans, move forward with MoneyHelper.

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