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How to take money from your pension

We take a look at the different ways you can access your pension, how to access a state pension and what you could consider if your pension has recently dropped in value.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

The road to retirement has changed significantly over the years. In most cases, there’s now no set date for giving up work or accessing your pension.

So, taking the time to get yourself and your finances retirement-ready is essential. And a key part will be choosing the right way to take an income from your pension.

To help, we’ve explained your three main options for your personal pensions below.

This article isn’t personal advice. If you’re not sure, please ask for more information, or speak to a financial adviser. Pension and tax rules change and benefits depend on your individual circumstances.

Taking tax-free cash from your pension

Most people won’t be able to access the money in their pension until age 55. This is set to rise to 57 in 2028.

If you have a defined contribution pension (like the HL SIPP), you can usually take up to 25% of your pension as tax-free cash. The rest is then taxed as income. You can choose to take this in stages or as one lump sum.

You might already have plans for your tax-free cash – paying off your mortgage, or helping your children get on the property ladder.

Whatever you do with it, it’s important to make sure you have a plan for it, as inflation can reduce its spending power over time. You can find out how to make the most of your tax-free cash, and planning for the future in our guide to taking money from your pension.

How to get a flexible income from your pension

Drawdown is one of the most flexible ways you can take money from your pension. You can usually withdraw up to 25% in tax-free cash if you want. Then you can take a taxable income from the remaining money, which can stay invested within a drawdown account.

There's no limit on withdrawals. You can choose to receive a regular income, or take money as and when you need to. It’s up to you.

If you don’t want to take your tax-free cash in one go, you can choose to use phased drawdown. This is where you move part of your pension into drawdown, and keep the rest invested in your pension. For example, if you had a pension pot worth £100,000, you could choose to move £50,000 into drawdown and receive £12,500 as a tax-free lump sum with the remaining £37,500 available to provide an income in drawdown.

Then at a later date you can choose to take more of your tax free cash entitlement (normally up to 25% of the remaining value in your pension). You might decide to do this if your pension has taken a hit over the past few months, but you need the money now. We explain why later on.

Another flexible retirement option is to take lump sums from your pension without moving it into drawdown. This is known as an Uncrystallised Funds Pension Lump Sum (UFPLS).

25% of the lump sum will normally be tax free and the rest taxed as income. This might be worth considering if you want to keep your pension invested and take your tax-free cash in smaller portions.

If you’re still planning to add money to your pension, then taking an UFPLS might not be right for you. Once you’ve flexibly accessed a pension (flexibly accessing a pension includes taking an UFPLS or, in most cases, taking a taxable income from drawdown) you’ll trigger the Money Purchase Annual Allowance (MPAA). That reduces the maximum amount that can be paid into money purchase pensions from £40,000 for most people, to £4,000. You won’t trigger the MPAA if you move into drawdown and only take your tax-free cash.

Drawdown and lump sum withdrawals come with risks. You need to make sure your withdrawals are sustainable. You could run out of money early on if they’re not. By choosing to keep your pension invested, your income will depend on the stock market, so it could fall in value if the investments you choose go down, and you could get back less than you invest.

How to get a guaranteed income from your pension

If you want to shelter your retirement income from falling markets, you could think about swapping some, or all, of your pension for an annuity. An annuity will give you a guaranteed income for the rest of your life and even after you’re gone. It doesn’t matter what happens in the stock market, or how long you live.

Again, you can normally choose to take up to 25% as tax-free cash, and then any annuity income you receive is taxed as earned income. The amount of annuity income you receive will depend on a number of things, like the size of your pension and annuity rates at the time you buy. But it also includes the annuity features you choose, and your health and lifestyle details.

MORE ON ANNUTIES

It’s easy to find out how much guaranteed retirement income you could get. You can request an annuity quote at any time. Just make sure you shop around to get the best annuity rate available to you.

There are currently six annuity providers on the open market and each one will normally offer you a different rate. You’ll get more or less income depending on which provider you choose.

You can get an instant quote from each provider with our online annuity calculator. All you need to do is answer some questions about you and your pension. And by giving details about your health and lifestyle, you could get a higher annuity income.

Even if you’re not set on choosing an annuity, it’s worth knowing how much guaranteed income you could secure. It won’t cost you a penny, and it’ll help you compare your options and keep an eye on ever-changing rates.

Annuity quotes are only guaranteed for a limited period and rates will go up and down in future. If you decide to go ahead, your annuity cannot be changed or cancelled.

REQUEST A QUOTE

If you request an annuity quote before 29 June 2020 using our online annuity tool we’ll enter you into our prize draw to win 1 of 5 Fortnum & Mason hampers. Terms apply.

How do I get my State pension?

Another source of secure income is the State Pension. For most people this will make up a vital part of their retirement income. But you don’t get it automatically, you have to claim it.

If you’re eligible, you should get a letter no later than two months before you reach your State Pension age telling you what you need to do to claim it. How much State Pension you’ll get largely depends on how many ‘qualifying years’ of National Insurance (NI) contributions you have.

MORE ON THE STATE PENSION

Although the State Pension gives a source of secure income, for most retirees it won’t be enough on its own. This is important to consider when weighing up your retirement options.

Balance security and flexibility

Throughout retirement it’s likely that your income needs will change and you might need to use more than one retirement option. Don’t forget you have the opportunity to mix and match your options. This could help you find the right balance. For example, you could use an annuity to help cover essential costs, and use the flexibility of drawdown for your nice-to-haves, or to help you reduce your working hours.

To find out more about how to take money from your pension, download our guide.

What if my pension has dropped in value?

If the value of your pension has fallen recently, but you need the income from your pension now, you could consider taking a smaller portion of it than planned. If the markets recover, it gives the remaining value of your pension the chance to recover as well.

For instance, if you took your full tax-free cash entitlement, you’d be choosing to sell at lower prices to make that cash available. This could mean you’re sacrificing a potentially higher tax-free cash amount. Though, there’s no guarantee the value of your pension and investments will rise again in the future.

Choosing what to do with your pension is one of the most important decisions we need to make in life. Rushing or making a rash decision based on short-term events could have long-term consequences for your retirement. If the value of your pension has dropped, it’s important you think carefully before deciding to access some, or all, of your pension.

If you’re unsure about your options you should consider getting guidance or advice.

If you’re 50 or over you can get a free guidance session with Pension Wise. They offer an impartial government service about the different ways you can take money from your personal or workplace pension. Or you might decide now’s the right time to get advice from an adviser. Not only is retirement a time when advice could be worth paying for, and you’ll likely benefit most, but recent uncertainty might have caused your confidence to dip.

MORE ABOUT RETIREMENT ADVICE

OUR GUIDE TO TAKING MONEY FROM YOUR PENSION

To find out more about each of your retirement options, including the risks and benefits, download our guide.

You’ll also get helpful tips and steps to choosing the right option for you.

Download Guide

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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