Taking some of your money as and when you need it

One of your choices at 55 – Freedom to choose

From the age of 55, you have the freedom to use your pension money. You can take the first 25% tax-free and the rest will count as part of your annual income, taxed at your marginal rate. One of your options is to take money from your pension as and when you need it. We explain more...

Taking some of your money as and when you need it

If you're not sure how your income needs will change in the future, you have the option to take money from your defined contribution pension pots as and when you need it. There are a few ways to take income from your pension, each with different tax implications. Here's an overview.

Withdrawing cash from your pension pot

You may have the option to take cash lump sums from your pension pot whenever you need to. 25% of whatever you take will be tax free, while the remaining 75% will be taxable. Whatever you don't take as cash stays invested in your pension pot.

Here's an example:

20% Your pension is £100,000. You take out £20,000 each time.

5% £5,000 is paid to you tax free.

15% £15,000 is taxable.

80% After your first withdrawal, £80,000 is left in your pension pot.

Good to know

  • You may have the flexibility to withdraw cash part tax-free, part taxable.
  • Once you've withdrawn any taxable cash, you're not allowed to contribute more than £4,000 (tax year 2020/21) to your money purchase pension pot arrangements each year.

Income Drawdown

With income drawdown, you can take all of your 25% tax-free cash as a single lump sum or you can take it in installments. For this to happen, you must move some or all of your pension pot into a drawdown fund. here, it will continue to be invested. The remainder stays invested where it is in your pension pot. 

You can take cash from drawdown whenever you want, but the amount you withdraw will be taxable.

Taking all your tax-free cash as a single lump sum

Here's example A:

100% Your pension holds £100,000.

25% You take your 25% tax-free allowance, so £25,000.

75% £75,000 will be moved into drawdown.

Good to know

  • Allows you to keep your pension withdrawals flexible around your other income, requirements and tax circumstances.
  • Annual allowance for contributing into your money purchase pensions is not impacted until taxable income is withdrawn when it will reduce to £4,000 each year (tax year 2020/21). Until then, you can take the tax-free cash sum leaving the rest in drawdown and still make further money purchase contributions of more than £4,000 each year.

Taking some of your tax-free cash in instalments

Here's example B:

100% Your pension holds £100,000.

25% Your tax-free allowance is 25%, so £25,000.

10% But you choose to only take £10,000. This is paid to you tax-free.

30% £30,000 has to be moved to drawdown.

60% £60,000 is left in your pension pot.

15% Out of this, £15,000 will be tax free

45% £45,000 is taxable.

Good to know

  • Gives you the flexibility to take cash from your original pension pot (selecting taxable or tax-free money depending on what you've already taken) or from your drawdown (taxable).
  • Once you've withdrawn any taxable cash, you're not allowed to contribute more than £4,000 to your money purchase pension pot each year (tax year 2020/21).

Important things to consider

  • You can carry on withdrawing money from your pension until your fund runs out, if you choose to. It means you need to be careful that you leave enough money for the rest of your retirement.
  • In the examples above we have assumed no investment changes to the value of your pension pot or drawdown, but as it stays invested, it still has the potential to go down or up in value and you may get back less than the amount invested. A sustained drop in the value of the investment means that you will have less money with which to take an income.
  • Tax rules and your personal circumstances may change in the future, which you should keep in mind when making your pension income decisions now.  Information on this page is based on our interpretation of tax rules, and tax benefits will depend on an individual's circumstances.
  • Your annual allowance reduces to £4,000 (tax year 2020/21) for any money purchase pension arrangements you have once taxable income is taken. Other pension arrangements may also be affected. If you're still paying into your pension – or think you might do – think carefully before you take anything out of it. 
  • The  Lifetime Allowance (LTA) may affect individuals whose total UK pension savings are near to or more than £1,073,100 (tax year 2020/21).
  • Any funds left when you die can be passed to your beneficiaries, who may be able to choose how to take the money. To find out more about how your money purchase pension will be taxed after you die visit gov.uk/tax-on-pension-death-benefits
  • If you are using any of the options described on this page while you are waiting to buy an annuity, you could get more or less income than you would have had you bought an annuity prior to taking any money on an ad hoc basis, as annuity rates are changeable.

What next?

  • If you are aged 50 or above, we recommend you speak to Pension Wise or a Financial adviser before making any decisions to take benefits. Pension Wise is a government service offering free and impartial guidance. This tailored guidance is available online, over the phone or face to face. Go to www.pensionwise.gov.uk or call 0800 084 5076.
  • Once you've decided which income option you'd like to go with, check with your pension provider. Not all pensions are the same and not all providers offer the same options so make sure you look into what you need to consider before you transfer your pension, including how much this may cost and whether you would lose any valuable benefits from your existing pension.
  • Work out how much tax you might have to pay on the cash you take out of your pension.

Things to think about

Using your pension money will leave less money in your pension, and will have an impact on:

  • The money you’ll have in retirement. Anything you use now will mean less, or even nothing at all, is left in your pension.
  • The value of your investments. If you choose to only withdraw some of your money, what’s left will remain invested, and could go down as well as up in value.
  • The access you have to your money. Once you buy an income for life you can’t generally change it or cash it in, even if your personal circumstances change.
  • The inheritance you can pass on. This depends on what you decide to do with your pension money