Your options for taking money from a pension

Most people with a defined contribution pension, the commonest kind of workplace and personal pension, can choose how and when to take their money rather than being handed a single route at retirement. You can normally start from age 55, rising to 57 from April 2028, and you can usually take up to 25% of your pot tax-free, up to a maximum of £268,275 across all your pensions¹.

The main routes are: leaving the pot invested and drawing an income as and when you want (drawdown); buying an annuity, which pays a guaranteed income for a set period or for life; taking the pot in a series of lump sums; or taking the whole pot in one go. You can also mix them, using different options for different parts of your savings¹. Each is taxed differently, each carries different risks, and none is right for everyone: the trade-offs are between certainty and flexibility, and between how much income you get now and how much is left later.

Nothing here applies to the State Pension, which is paid by the government from State Pension age under its own rules³. This page is about private and workplace pensions built from contributions and investment growth. Free guidance is available from Pension Wise, whose appointments cover when you can access your pots, the different ways to take money, how each option is usually taxed, and how to spot and avoid scams⁴.

The main ways to take money from a pension

For each pension you have, the money can come out as a lump sum payment, a monthly income, or a combination⁹. The legislation behind the pension freedoms allows only three types of pension to be paid from money purchase arrangements: scheme pensions, lifetime annuities and drawdown pensions¹⁰. In practice that translates into four choices most people see on a provider's menu: take some tax-free cash and leave the rest invested, take lump sums as you need them, swap the pot for a guaranteed income, or take everything at once¹.

You do not have to pick one route for everything. A common pattern is to take the tax-free cash, leave the remainder in drawdown, and buy an annuity with part of it later to secure a baseline income¹. Different pots can go different ways, and you can change how you use drawdown over time. What you cannot do is take money out before the minimum age, or undo an annuity once it is bought.

The options described here apply to defined contribution pensions, where the value is whatever has been paid in and how it has grown. If you have a defined benefit or final salary pension, the scheme pays you a guaranteed income from its own rules and the choices are different; the comparison of the two types explains how they differ.

When you can start: minimum pension age 55, rising to 57

You can currently take a private pension, including some workplace pensions, from age 55, and this increases to age 57 from April 2028³. The same age applies to every route: drawdown, lump sums, taking the whole pot and buying an annuity all normally wait until then⁶. You can take the money at any point after that age, whether or not you have stopped working¹.

The rise to 57 creates a gap for people in their mid-fifties. If you turn 55 between 6 April 2026 and 5 April 2028, you will be able to access your pension when you turn 55, but your pension age could jump to 57 in April 2028 depending on your circumstances¹². A parliamentary report confirms the Normal Minimum Pension Age is currently 55 and set to rise to 57 in 2028¹³.

There are exceptions. You may still be able to take your pension before age 55 in certain circumstances, for example if you are unable to work due to ill health¹⁴. If you are over 55 and have to stop work because of ill health, you may be able to take a personal or workplace pension early⁹, and the page on taking your pension early because of ill health covers that route. Some older schemes also have a protected pension age lower than 55, written into their rules⁶.

Tax-free cash: usually 25%, up to £268,275

Most routes start with the same building block: you can take up to 25% of your pension pot as a tax-free lump sum, up to a maximum of £268,275 across all your pensions⁵. MoneyHelper describes this as taking up to 25% as tax-free cash². The limit is a lifetime figure across every pension you hold, not 25% of each pot separately without a ceiling¹.

How you take the 25% depends on the route. With drawdown, you can take up to 25% from your pension as a tax-free lump sum at any time from age 55 (rising to 57 from April 2028), and leave the rest invested⁶. With lump sums, the tax-free share is spread across each withdrawal instead, usually 25% of each one⁸. The page on tax-free cash and the lump sum allowances explains the allowances in detail, including how they interact with the abolished lifetime allowance.

The remaining 75% is not tax-free wherever it goes. It is taxed as income when you draw it, whether as drawdown income, an annuity payment or a lump sum¹⁶. That is why a large withdrawal can push part of your money into a higher tax band: the taxable share stacks on top of your other income in the year you take it.

Pension drawdown keeps your pot invested

Pension drawdown means keeping your savings invested when you reach retirement, then taking money out as you wish¹⁷. You can take out as much as you want, whenever you want, although the taxable part is subject to income tax¹. The pot can continue to benefit from investment growth while you draw from it¹⁸, which is the route's main attraction: your money stays working rather than being swapped for a fixed income.

The cost of that is uncertainty. As your pension remains invested, its value can rise and fall until you take the money, which means your retirement income is not guaranteed⁶. A parliamentary report on pension freedoms describes drawdown as providing a regular income by reinvesting the fund in products designed for the purpose, with income that varies with fund performance¹⁹. If markets fall, the income you can safely draw falls with them.

You do not have to pick investments yourself. You can ask your provider to choose for you based on your preferences, using ready-made options called investment pathways, choose your own investments, or have a financial adviser manage them⁶. The page on drawdown and investment pathways explains how each works.

Two practical points are worth checking before you start. Not every provider offers income drawdown, so check with yours first²⁰, and some providers might insist you change a workplace pension to a personal pension to take the drawdown option²¹. You will also pay a fee to your provider for each withdrawal in some arrangements²², so the pattern of withdrawals matters as well as their size. The full guide to pension drawdown covers the mechanics.

Annuities swap your pot for a guaranteed income

An annuity pays a regular guaranteed income for a set period or for life⁷. You use your pension pot to buy one from an insurance company²⁰, or, in the language of older stakeholder pension rules, you use the fund you have built up to buy a regular income payable for life from a life insurance company²³. In exchange for handing over the pot, the provider takes on the risk of you living a long time: the income keeps coming however long that is.

What you get depends on several things, including your age and gender, the size of your pension pot, interest rates and sometimes your health⁷. People with existing health conditions, smokers and people who are overweight may qualify for an impaired or enhanced annuity, which pays out a higher income because your health or lifestyle may shorten your lifespan²⁴. Some providers may also boost your pension if you retire early due to an illness likely to affect your life expectancy²⁵.

Before buying, it is a good idea to start by checking what your pension provider is offering, because they may still offer a higher payment than you can get elsewhere, then shop around using the open market option²⁴. Some older policies include guaranteed annuity rates that let you convert your pension into a higher guaranteed income than you can get elsewhere²⁶, and the page on guaranteed annuity rates explains what to check before giving one up. The guide to annuity providers and shopping around covers the process.

The defining feature is finality. Once you buy an annuity, the decision cannot be unwound: you will not be able to alter your level of income or switch to another provider¹. The full guide to annuities covers the types available, including fixed term and lifetime annuities.

Taking lump sums (UFPLS) and cashing in your whole pot

Between drawdown and an annuity sits a middle route: taking your pot in a series of lump sums, sometimes called uncrystallised funds pension lump sums, or UFPLS. With this route, usually 25% of each withdrawal is tax-free, with the rest charged at your normal income tax rate⁸. TaxAid describes the same split: take 25% of every cash withdrawal tax-free, with the remaining 75% taxable as income¹⁶.

A worked example shows how it lands in a tax year. If you take a £20,000 lump sum, £5,000 of this would be tax-free and £15,000 would be treated as income¹. If you have no other sources of income, the first £12,570 of that, your personal allowance, will be tax-free, meaning the remaining £2,430 will be taxable¹. With other income, more of the withdrawal is taxed, because it stacks on top.

You can also take the whole pot in one payment¹. The earliest you can take any of your pension money this way is usually age 55, rising to 57 from April 2028¹¹. Taking everything at once is rarely tax-efficient, since three quarters of the pot is taxed as income in a single year, but there are small-pot rules: you can take a whole pension pot worth up to £10,000 as a lump sum²², which helps people clear up scattered small pots from old jobs. The pages on UFPLS and the comparison of a tax-free lump sum with UFPLS go deeper.

One administrative quirk: if you only withdraw part of the money from your pension, your provider will not give you a P45, because the pension pot is still active²⁷. That matters for how your tax code is applied, which is the subject of the next section.

Drawdown or annuity: how each one behaves

The two income routes sit at opposite ends of a trade-off. Drawdown offers flexibility and the possibility of growth, but no guarantees: your money can continue to grow because it remains invested¹⁷, and equally it can fall. An annuity offers certainty, a regular guaranteed income for a set period or for life⁷, but it cannot be undone once bought¹.

The choice is not once-and-forever. You can hold drawdown and buy an annuity later with part or all of the remaining pot, which some people use to secure income as they get older, when annuity rates tend to be higher. The comparison of drawdown and annuities works through the decision, and the page on buying an annuity after drawdown covers the sequencing.

Tax on withdrawals and the emergency tax trap

The taxable 75% of any withdrawal is charged as income in the year you take it, at your current tax rate²⁹. Tax rates in Scotland may be different¹⁶, and the page on how pension income is taxed explains the bands. Because a withdrawal adds to your other income, a large one-off sum can push part of it into a higher band than you normally pay.

The bigger trap is how the tax is collected at source. If you take a large one-off withdrawal from a pension, your provider may apply an emergency tax code, which can result in too much tax being taken³⁰. Payments under the pension flexibility rules are often taxed this way²⁷. If your provider does not have your tax code and details of other income, withdrawals are taxed using a higher-rate emergency tax code, calculated on what is known as a Month 1 basis³¹. The effect can be dramatic: a £10,000 withdrawal could result in you being taxed as though your annual income is £120,000³¹.

The overpaid tax can be reclaimed, and TaxAid explains how to claim a refund on pension tax²⁷. The refund route depends on how you took the money and whether the pot is still active, which is why the missing P45 matters for part-withdrawals²⁷. The page on emergency tax on withdrawals sets out the claim processes and forms.

Taking cash early can leave less for later

Flexible access cuts both ways. Once money is taken early, it is not invested for the years that follow, and the Pensions Policy Institute's research on using accessible pension savings as a financial safety net found that diverting contributions from pensions is likely to lead to a lower private pension income in retirement³². Evidence to a parliamentary committee made the same point from the other direction: one of the main challenges with pensions is the lack of flexible access under age 55³³. The design of pensions, locked up until the minimum age, is what buys the tax relief and the decades of growth.

Taking taxable withdrawals also limits how much you can pay back in. Once you have used flexible access, the amount you can continue to contribute to a defined contribution pension while getting tax relief falls under the money purchase annual allowance, covered in the page on the annual allowance. Someone who empties a pot at 55 and then wants to rebuild savings faces both a smaller pot and a tighter contribution limit.

There is also a protection angle. If your employer goes out of business, you will still get your pension from a trust-based defined contribution scheme, but your pension pot might be reduced because administration costs are paid by members' pots³⁴. Money left in a pension is generally outside your estate for inheritance tax purposes until April 2027, when it is due to be added to the rest of your estate and could be subject to inheritance tax if the total value exceeds the tax-free allowances¹. The page on pensions and inheritance tax covers the change.

Will pension withdrawals affect my benefits?

They can. The general rule is that anything you take out of your pension is treated as income or capital in the normal way, so it may affect means-tested benefits³⁵. A lump sum sitting in your bank account counts as capital; a drawdown income counts as income. Money still inside the pension is treated differently, which is why the timing and size of withdrawals matter for anyone claiming.

This interacts with the tax point in the opposite way to what people expect. Taking a large lump sum to live on can reduce or end a means-tested benefit claim, leaving you with a tax bill on the withdrawal and less support than before. Drawing a smaller income gradually may keep both the benefit and the tax position on an even keel. The page on how pensions affect Pension Credit and other benefits works through the tests.

If you are considering using pension money to deal with debts, take advice first: you may have to pay tax on some of the money that you take, and the lump sum may count against benefits. Free debt advice is available from charities, and the debt section lists the options.

Spotting a pension scam

Pension scams tend to strike at exactly the moments described on this page: when people seek to transfer their benefits to a different arrangement, take early retirement or take their benefits³⁶. The Pensions Regulator expects scheme governing bodies to put clear information on how to spot a scam in all relevant communications to members, including the retirement wake-up pack and annual benefit statements, and on the scheme's website³⁶.

The warning signs are consistent across official sources: unexpected offers, promises of early access to pensions, or guaranteed high returns¹⁵. The first step of the regulator's pledge to combat pension scams is simply to know the warning signs³⁷. The practical rules that follow from them:

• Never access your pension or transfer money because of a cold call, visit, email or text: it is likely a scam⁶.
• Treat any offer of access before age 55 as a red flag, since the rules do not allow it outside ill health and similar exceptions¹⁴.
• Be suspicious of guaranteed high returns or unusual investments¹⁵.
• Take your time: legitimate providers do not pressure you to act quickly.

A free Pension Wise appointment covers how to spot and avoid scams alongside the options themselves⁴. The full guide to pension scams lists the warning signs in detail and what to do if you have already transferred.

What happens to your pension when you die

Your pension provider will ask you to complete an expression of wish form, which tells them who you would like to receive your pension when you die, and it is worth keeping it updated². What the beneficiaries actually get, and how it is taxed, depends on the route you chose and your age at death.

For money in drawdown, age 75 is the dividing line. If you die before 75, your beneficiaries can access any money remaining in your drawdown plan tax-free²⁸. If you are 75 or over when you die, your beneficiaries can either draw money from the pension as an income or take the fund as a lump sum, and both options will be taxed²¹; the money passed on is taxed as income¹. Macmillan describes the same split for people with cancer planning what to leave behind³⁸.

Other routes behave differently. A defined benefit scheme will usually pay out a lump sum to your spouse or civil partner if you die before taking the pension, typically two or three times your salary²⁸. Public sector schemes have their own rules: under the Armed Forces Pension Scheme 2005, if you die after your pension has come into payment, your spouse or partner receives a pension for life worth 62.5% of your pension³⁹. The pages on death benefits, nominating a beneficiary and what happens to pensions when someone dies cover each in detail.