Different ways to access your pension pot

To get the most out of your pension savings in retirement, you’ll need to understand how you can best access them when the time comes.

Most modern workplace and personal pensions are defined contribution pensions. You can currently access both of these pension types from the age of 55 (rising to 57 from 2028). When you reach the point of finally accessing your pension pot, there are a variety of ways to withdraw your retirement savings. So when  it comes to choosing what’s right for you, it very much depends on your specific circumstances and goals – there isn’t a one-size-fits-all approach. But you can use a mixture of options, rather than having to rely on just one.

Withdrawal options

1. Withdraw everything

As with any pension withdrawal option, you’ll need to weigh up the tax implications. You can only take 25% of your pension tax-free, with the rest taxed according to your income band. Withdrawing a large amount might also push you into a higher tax bracket. Try the PensionBee Pension Drawdown Calculator to better understand how tax may affect your withdrawals.

It’s also worth considering that once your pension is converted to cash, it’ll be vulnerable to the impacts of inflation. You can use the PensionBee Inflation Calculator to visualise how inflation might affect the value of your pension pot over time and understand how far your savings may go in retirement.

2. Take a flexible income via pension drawdown and leave the rest invested

Known as ‘flexi-access drawdown’. This option provides complete control over your pension income, allowing you to make withdrawals as and when you need. You can still take up to 25% tax-free, with any withdrawals over this amount taxed at your usual rate.

How you take your pension is up to you. You could take all of your tax-free cash at once, leaving the rest invested. Or you could choose to take a series of smaller tax-free cash payments. You could even combine small amounts of your tax-free cash alongside taxable amounts in each withdrawal. Opting for flexible drawdown means that at least part of your pension remains invested, which offers the opportunity for investment growth. This isn’t guaranteed, however, and the value of your pension can go down as well as up. This is different to an annuity, which provides a fixed income either for life or a fixed-term. Once you’ve bought an annuity you can’t reverse your decision (more on those later!).

3. Take your pension as a number of lump sums

Known as uncrystallised funds pension lump sum (UFPLS) and like flexi-access drawdown, UFPLS allows you to take your pension as a series of lump sums. The difference is that each withdrawal must include 25% tax-free cash, with the remaining 75% taxed at your usual income tax rate. As before, the rest of your pension remains invested in the stock market, and so it can fall as well as grow subject to market movements.

4. Purchase an annuity

An annuity pays a guaranteed income for life, or for a fixed-term. You can still take up to 25% of your pension tax-free, and then use the rest to buy an annuity. Annuities provide you with a guaranteed regular income that’s taxed as earnings.

Your annuity income will depend on things like your age, health and where you live. Generally, the older you are, the higher the annuity rates you’ll be offered. You can also expect higher annuity rates if you have a shorter life expectancy or if you’re in poorer health.

5. Delay taking your pension

Delaying might be the preferred choice for those who wish to continue working, or have other sources of income to draw upon in retirement. It means leaving your pension invested, potentially benefiting from further investment growth. However, markets can go down as well as up and with any investment there will always be fluctuations in value.

6. Take a regular income via pension drawdown using regular withdrawals

Regular withdrawals are a pension drawdown option from PensionBee to help customers manage their pensions more easily. This new drawdown feature allows customers to ‘set and forget’ your pension withdrawals. Simply, choose how much you’d like to take from your pension and then select a payment date from the available options. Your money should then arrive in your bank account on your chosen date each month (although weekends or bank holidays might impact the processing time of your payment). This saves going through the manual withdrawal process each time you want to draw down from your pension.

7. A combination of the above

Why not combine a few of the above options in a way that best suits you? For example, perhaps you’d like to do some home improvements or book a holiday. You could take part of your pot as a lump sum, but leave the rest invested to draw down from as and when you need.

Alternatively, for those not in a position to give up work completely, you could withdraw some pension cash, but continue to contribute. Just remember, once you begin accessing the taxable part of your pension the money purchase annual allowance (MPAA) is triggered. This will limit how much tax relief you can receive on your pension contributions to £10,000 for the current tax year (2024/25).

You could even combine an annuity with flexible drawdown income. This might suit those in the early days of retirement, when the flexibility of being able to access your money whenever you like is important. Then, as you grow older, the guaranteed income that comes with purchasing an annuity might become more attractive to you. Plus, you’re likely to get better rates for your annuity as you age.

Finding help

For a better understanding of all things pensions and how to prepare for a happy retirement, go to PensionBee’s Pensions Explained content hub and check out their Retirement Guide for lots of useful information, jargon-busting and handy tools.

Risk warning As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.

About PensionBee

PensionBee can help you withdraw flexibly from your pension from the age of 55 (rising to 57 from 2028). You can take your pension flexibly online or through our PensionBee app via drawdown. For more information, visit PensionBee.com.

Start planning your pension withdrawals with the PensionBee Drawdown Calculator.

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