Drawing your Pension

You have saved into your pension over a working lifetime. Now you’re approaching retirement, what do you do with all that money?

The first thing to remember is why you saved in the first place. Your pension is intended to be your source of income in retirement – perhaps your only source, other than the very modest State Pension. So you should make every effort to use it as wisely as possible, so that it lasts for as long as you need it to.

What options do I have for drawing my pension?

Thanks to pension freedom, how you use the money in your pension pot is up to you. You can take a tax-free lump sum of 25 per cent, with the rest taxed at your current rate of income tax, or make a series of small withdrawals with 25 per cent of each withdrawal tax-free. You can even withdraw the whole sum in one go, although this is would mean 75 per cent of it is taxed (so you would lose a big chunk of your savings).

The main alternatives for funding your retirement are:

  • leave your pot invested and make withdrawals as needed
  • purchase an annuity (a guaranteed income for life)
  • set up a drawdown scheme
  • a combination of annuity and drawdown.


Quick pension guide

Confused by pension freedom? This guide makes it simple, summing up your main options and outlining the pros and cons of each.

Remember that the best choices for your retirement will depend on your individual circumstances and goals, so it's best to discuss these with a financial adviser before making any decisions.

What happens if I die before spending all my pension pot?

Any unspent money in your pension pot can be passed on to your beneficiaries free of inheritance tax. This makes your pension a potentially very useful tool for inheritance tax planning.

What if I have a final salary pension?

If you are lucky enough to have a final salary workplace pension, then you don’t need to do anything – this will pay out to you automatically once you reach retirement age. It is sometimes possible to transfer out of a final salary scheme to get a lump sum, but it is usually compulsory to take advice on this so that you fully understand the implications.

I want to phase my retirement

Pension freedom makes it much easier to retire gradually. You can draw on your pension pot from the age of 55 onwards, so you could (for example) reduce your working hours and use your pension to supplement your income, before entering full retirement.

Where can I find more information?

Talk to a financial adviser to discuss your options in retirement. Most financial advisers offer a free initial meeting, and many listed on unbiased.co.uk also offer a free pension check. This should give you a good idea about whether advice could deliver value for you.

Search for an adviser here.