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What you can do with your pension pot

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 your options at www.pensionwise.gov.uk.

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 the 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.

Example:
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 trated 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.

Example:
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.

Example:
You earn £25,000 a year so your income tax is 20%. You receive £20,000 taxable amount from your pension pot. This makes your total income for the year £45,000. This takes you into the higher tax bracket of 40%.

Buy an annuity

You can use your pension pot to buy an annuity from an insurance company.

An annuity is a 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 on one that suits you. The Money Advice Service has guidance on how to shop around for an annuity.

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. This means there's no maximum amount you can take, and you won't need £12,000 in other annual income to withdraw as much as you want to.

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.

Find out about scams and what to watch for at Pension Wise: https://www.pensionwise.gov.uk

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. Work out when you'll reach Pension Credit age on GOV.UK - it's not the same for everyone, it depends on when you were born and your sex. 

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 a benefits calculator like the Turn2us calculator to work out your benefits eligibility, or 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 can find out about your options at www.pensionwise.gov.uk.

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're approaching retirement or 50 or over

Visit the Pension Wise website to book an appointment. You can also book an appointment by visiting your local Citizens Advice Bureau.

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 the Money Advice Service for free and impartial advice on pensions.

The Money Advice Service
www.moneyadviceservice.org.uk
Telephone: 0300 500 5000
Monday to Friday, 8am to 8pm
Saturday, 9am to 1pm

The Pensions Advisory Service can also give you free advice on your pension options, but they can't give you financial advice.

The Pensions Advisory Service
www.pensionsadvisoryservice.org.uk
Telephone: 0300 123 1047

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