2. How your pension is paid

You can decide how you take money from your pension pot - ask your pension provider what options they offer.

You can transfer your pension pot to a provider that gives you different options.

In most schemes you can take 25% of your pension pot as a tax-free lump sum. You’ll then have 6 months to start taking the remaining 75% - you can usually:

  • get regular payments (an ‘annuity’)
  • invest the money in a fund that lets you make withdrawals (‘drawdown’)

You may have other options - you get 25% tax free when you:

  • take a whole pension pot worth up to £10,000 as a lump sum
  • withdraw cash from your pension pot (‘uncrystallised funds pension lump sums’)

These options apply to you if you’re in a defined contribution pension scheme - a pension pot that’s based on what you or your employer paid in.

Your pension provider will take off any tax you owe before you get money from your pension pot. You may have to pay a higher rate of tax if you take large amounts - and you may owe extra tax at the end of the tax year.

Get regular payments from an annuity

You may be able to buy an annuity from an insurance company that gives you regular payments for life. You ask your pension provider to pay for it out of your pension pot.

The amount you get can vary. It depends on how long the insurance company expects you to live and how many years they’ll have to pay you. When they calculate the amount they should take into account:

  • your age and gender
  • the size of your pension pot
  • interest rates
  • your health (sometimes)

There are different kinds of annuities. Some are for a fixed time (eg payments for 10 years instead of your lifetime) and some continue paying your spouse or partner after you die.

You don’t have to buy your annuity from your pension provider. You can shop around to get the best deal.

Invest the money in a drawdown fund

You may be able to ask your pension provider to invest your pension pot in a ‘flexi-access drawdown’ fund.

If you have a ‘capped’ drawdown fund, you can keep it or ask your pension provider to convert it to flexi-access drawdown. If you had a ‘flexible’ drawdown fund, it converted automatically.

From a flexi-access drawdown fund you can:

  • make withdrawals - you’ll pay a fee to your pension provider for each withdrawal
  • buy a short-term annuity - this will give you regular payments for up to 5 years
  • pay in - but you’ll pay tax on contributions over £10,000 a year

Keeping your capped drawdown fund

Your money will stay invested, and you can keep withdrawing and paying in. Your pension provider sets a maximum amount you can take out every year. This limit will be reviewed every 3 years until you turn 75, then every year after that.

Withdraw cash from your pension pot

You may be able to take cash directly from your pension pot. You’ll be able to:

These are called ‘uncrystallised funds pension lump sums’.

When you can’t withdraw cash

You can’t withdraw cash (uncrystallised funds pension lump sums) from your pension pot if any of the following apply:

  • you’ve already saved £1.25 million in pension schemes over your lifetime (your lifetime allowance)
  • you have some types of lifetime allowance protection
  • you’re under 75, and the sums you want to withdraw are bigger than the amount of lifetime allowance you have left

Find out more about your options on Pension Wise. You can also book an appointment to speak to someone.