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Woman getting advice

It’s important to know what you can do with your pension pot when you retire so you can make the best choice for you.  

If you have saved into a defined contribution scheme, pension freedom reforms from April 2015 mean you now have more options for how you use your money. You can:

These options are not available for those who have a defined benefit (final salary) pension scheme. Talk to your employer or pension provider if you are unsure.

Cash lump sum

No matter what size your pension pot is, you can either take it all as a single lump sum, or withdraw it in stages.

Some things to consider when taking a cash lump sum:

  • Only 25% of each withdrawal will be tax-free.
  • The remaining 75% will be taxed at your highest rate of tax, and it may also push you into a higher tax bracket. You could go from paying no tax to being taxed at 40%.
  • If you’re currently claiming any means-tested benefits, you may find you’re no longer eligible for them if your income and/or savings increase.

You also need to consider the effect of withdrawing money on your future pension provision and on any means-tested benefits you claim now or will claim in the future.

You may benefit from a lump sum payment if you have outstanding debts or an interest-only mortgage to pay off. Seek advice if you’re considering this. Remember that you don’t have to rush into any decision, and be aware of pension scams.

Income drawdown scheme

In a drawdown scheme, you transfer your pension pot into a scheme which is then invested on the stock market. You can then take regular income from it to fund your retirement. This can be an attractive option if you have a large pension pot.

Some things to bear in mind for income drawdown:

  • Fees may be expensive.
  • Your income isn’t a guaranteed amount.
  • Your investment could decrease as well as increase depending on the stock market.
  • There is also no limit on how much you can withdraw annually, meaning you could run out of money.
  • If you run out of money you may find your entitlement to benefits such as Pension Credit affected.

Whichever option you’re considering, make sure you take independent advice before deciding what to do with your money, and be aware of pension scams.

Annuities

You can buy a lifetime annuity (often called just an annuity). This converts your savings into an annual pension, giving you a guaranteed income for life or a specified period.

There are different types of annuities available, suiting different people’s needs and circumstances. If you're in a couple, for example, you should think about whether you want a single life annuity just for you or a joint life one. A joint life annuity will pay out to your spouse or partner after your death, but this is usually at a lower rate.

Get more advice on annuities

Think carefully before choosing an option

There are lots of factors to consider when choosing an option: do you want the certainty of a guaranteed income or the increased flexibility of choosing how to invest your money? You’ll need to consider your lifestyle, family, age, life expectancy, care needs and other sources of income too.

Seek advice before making any decisions and consider all your options carefully.

Where to get further help

It’s important to get good advice on what you can do with your pension. The following organisations can give more detailed advice on what you could do with your pension pot.

You can also find a specialist financial adviser using the Money Advice Service’s online independent adviser directory.

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Further information

For more information: Call Age UK Advice: 0800 169 2081

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