If you want to receive tax-free cash and take an income, there are three things you might consider doing.
One is to use your pension to buy an
annuity (which provides a guaranteed income for life). You’ll receive up to 25% of your pension
as a tax-free cash payment, but the rest will be exchanged for a regular secure income. This is taxable,
and can’t normally be changed once set up, but will be paid for the rest of your life. How much income
you’ll receive will depend on different factors, like your age, pension value, the rates available
at the time and features you choose. Shopping around for the best rate and confirming health and
lifestyle details could mean you get more income.
Another option is to move your pension into
drawdown. You’ll still receive up to 25% as a tax-free cash payment, and the rest will be kept
invested as you choose. You can then make withdrawals (which will be taxed as income) from your investments,
when you’re ready.
Or you could take
lump sum withdrawals, where 25% of each withdrawal will usually be paid tax free and the rest
will be taxed as income. You could even withdraw your whole pension as one lump sum if you want to.
With drawdown and lump sum options you need to be mindful of how long you need your pension to last.
Unlike an annuity, your income isn’t guaranteed because investments can fall in value as well as
rise, so you may not get back what you originally invested. Taking large withdrawals could also affect
your tax situation, so make sure you’ve planned for this before making any decisions.