Get help with Pension Wise
Pension Wise is a free and impartial service to help you understand what your pension options are.
You can find out about Pension Wise on the MoneyHelper website.
Defined contribution pensions
This page applies to 'defined contribution' pensions. 'Defined contribution' pensions are built up over time by you or your employer making regular payments into it. The total amount of money you have for your retirement depends on how much was paid into the pot and how the fund's investment performed. Check with your pension provider if you're not sure what type of pension you have.
When you can get your pension
The earliest you can start getting a defined contribution pension is usually when you’re 55 - you should check this with your pension provider. You might be able to get your pension sooner if you’re retiring due to ill health.
You should get financial advice before making decisions about your personal or workplace pension. You might have to pay for financial advice but it can save you money long term.
Taking your pension: your options
You have a number of options for how to access the money in your pension pot. Your options for taking your personal pension are:
take some or all of your pension pot as a cash lump sum, no matter what size it is
buy an annuity - you can take a cash lump sum too
take money directly from the pension fund, and leave the rest invested (income drawdown) - there won't be any restrictions for how much you can take
a mix of these options
It’s important to know the different tax rules for each option.
Take cash lump sums
You can take your whole pension pot as cash straight away if you want to, no matter what size it is. You can also take smaller sums as cash whenever you need to.
25% of your total pension pot will be tax-free. You'll pay tax on the rest as if it were income.
Your pot is £60,000. If you take the whole pot at once, you'll get £15,000 (25% of £60,000) tax-free. The remaining £45,000 will be treated as income, so you'll pay income tax on it.
If you take smaller sums of money at different times, 25% of each sum is tax free.
Your pot is £60,000. If you take £1,000 out as cash every month. £250 (25% of £1,000) will tax-free every time. The remaining £750 will be taxable each time.
Any taxable money you take from your pension will be added to your other income for that year and taxed at the relevant income tax band. This may take you into a higher tax bracket than normal.
Buy an annuity
You can use your pension pot to buy an annuity from an insurance company.
An annuity is an annual income that will be paid to you for the rest of your life.
You can take some of your pension fund as a tax-free cash sum and buy an annuity with the rest.
There are many types of annuity available to buy - you should shop around to find the best one that suits you.
Check guidance on buying an annuity on MoneyHelper.
You can't usually change your mind once you've bought an annuity.
Income drawdown
Income drawdown lets you take an income from your pension pot, while the rest is left invested. You should check with your pension provider to see if they offer income drawdown - some won't offer it.
There are no restrictions on the amount you can take using income drawdown.
You can still take 25% of your pension pot as a tax-free lump sum.
Mix your pensions options
You'll be able to mix any of these pension options at different times in your retirement. For example, you can take some cash from your pot first and buy an annuity later.
Pension scams
Pension scams have become more common since April 2015, when new rules allowed people to take some or all of their pension pot as a lump sum. These scams are fake investments designed to con you out of your money. They are often extremely convincing and anyone can be caught out.
Check the signs of a pension scam on MoneyHelper.
Taking money from your pension pots could affect your benefits
Some benefits are worked out based on how much income and capital you have - these are called 'means tested benefits'. Capital is money you have in your savings and investments.Means tested benefits include:
Housing Benefit
Income Support
income based Jobseeker's Allowance
income related Employment and Support Allowance
Pension Credit
Taking money out of your pension could affect your eligibility for these benefits.
The rules are different depending on if you've reached Pension Credit age. Pension Credit age isn't the same for everyone - it depends on when you were born and your sex. You can work out when you'll reach Pension Credit age on GOV.UK.
If you're Pension Credit age or over
If you apply for means tested benefits, money from your pension that you would be entitled to (as well as any money that you withdraw) will be considered when working out your capital and income.
If you already get means tested benefits they could be reduced or stopped if you don’t take money out of your pension that you're entitled to take. If you don’t take money out, you will be treated as having 'notional income', which means this money will affect your entitlement to benefits.
If you take a lump sum amount from your pension and spend it quickly then apply for benefits, you might not be eligible because the money you've taken from your pension could be counted as 'notional capital' - this means it's counted as capital when working out if you're eligible for benefits.
So you should consider the following when deciding whether to take money out of your pension pot:
if you take income from your pension pot, the amount will be considered when working out if you're eligible for means tested benefits - so your entitlement will reduce or you could lose your eligibility
if you are entitled to take income from your pension and choose not to take it you will be treated as having notional income
the more capital or income you take at once the more it will affect your entitlement
any money you take out as a lump sum could mean your entitlement gets reassessed
if you spend a lump sum quickly and become entitled to more benefit as a result the benefit decision maker could decide your motivation for spending the money was to make sure it didn’t affect your means tested benefits, you could be seen to still have the money and have your benefits reduced or lose benefits
If you're under Pension Credit age
Only the money you actually take out of your pension is counted as income or capital, not the full amount that you're entitled to take. The rules are the same otherwise. This means:
money you take out of your pension will be considered as income or capital when working out your eligibility for benefits - the more you take the more it will affect your entitlement
if you already get means tested benefits they could be reduced or stopped if you take a lump sum from your pension pot
if you already get benefits, any money you take out and spend quickly could mean your entitlement gets reassessed
if the benefit decision maker decides a your motivation for spending the money was to make sure it didn’t affect your means tested benefits, you could be seen to still have the money and have your benefits reduced or lose benefits
Use a benefit calculator to check your benefit eligibility
You can use the Turn2us benefits calculator to check which benefits you can get. You can also get financial advice.
Get help with Pension Wise
Pension Wise is a free and impartial service to help you understand what your pension options are.
You canfind out about Pension Wise on the MoneyHelper website.
Booking an appointment with a pensions guidance specialist
You can book a free appointment with a pensions guidance specialist who will talk through your pension options with you. Appointments will be either over the phone or face to face with specialists from The Pensions Advisory Service and Citizens Advice.
An appointment will be relevant to you if:
you have a defined contribution pension pot
you'reapproaching retirement or 50 or over
Book a Pension Wise appointment on the MoneyHelper website, or call 030 0330 1001 between 8am and 8pm, Monday to Friday. You can also book an appointment by visiting your nearest Citizens Advice.
Other help with pensions
You should get financial advice before making a decision about how to take your pension pot. You might have to pay for financial advice, but it can save you money in the long term.
Contact MoneyHelper for free and impartial advice on your pension.
MoneyHelper
Telephone: 0800 011 3797
Monday to Friday, 9am to 5pm. Closed on bank holidays.
Calls to this number are free.
