Just as children seem to grow up in the blink of an eye, retirement can arrive faster than you expect.
And if yours is on the horizon, you’re probably starting to think more seriously about your finances — and the different ways you can withdraw from your pension.
One of the biggest decisions you'll face in this coming period is how to access your pension savings — and with several routes available, it’s important to understand how they work.
From taking a lump sum to setting up a regular income, each option comes with its own set of considerations, including tax, flexibility, and long-term sustainability.
What’s best for you will depend on your personal goals, the type of pension you have, and what kind of retirement you’re planning for.
In this guide, we’ll explain the main ways you can withdraw money from your pension pot, including the pros and cons of each.
Contents
- How do pensions work when you retire?
- What are my pension options?
- Pension drawdown
- Pension annuity
- Annuity VS drawdown
- Lump sum
- Stay invested
- Mixing pension options
- Which pension option is best for me?
How do pensions work when you retire?
From the age of 55 (or 57 from 6th April 2028) is usually when you’re allowed to first access your private or workplace pension.
At this point, your pension provider will reach out to explain your options when it comes to withdrawing money from your pension, and you can typically expect to receive confirmation of this a few months before you reach the minimum retirement age.
While you don’t have to start receiving your money straight away, it’s still worth taking some time to consider your pension pot options and decide how and when you should begin drawing an income in retirement.
These may include taking a tax-free lump sum (up to 25%), setting up a guaranteed income through an annuity, or opting for a more flexible drawdown arrangement. You can also choose to take your entire pot as cash, though it’s worth noting that doing so could have significant tax implications. More on all of this coming up!
For those with more than one pension, you can treat each pot as distinct and mix the options to suit your needs. Just be aware, not all providers offer every option, so it’s worth reviewing what’s available and getting professional guidance if you’re unsure.
What are my pension options?
While you may be wondering “how can I withdraw my pension?”, it’s also worth considering “what sort of retirement do I want?”– as this can actually be a key part of deciding which of the pension options are right for you.
When it comes to taking money from your pension, there’s no one-size-fits-all approach. What matters is your personal circumstances, including how much is in your pension pot, how you plan to use it, and whether you want a regular income or more flexibility.
Each option comes with its own pros and cons. Some choices are permanent, while others offer more room to adapt as your needs change.
Below, we’ll break down the main options available when you retire so you can weigh up what might suit you best when it comes to pension withdrawal.
Pension drawdown
Pension drawdown is one of the two main ways to take a regular income from your pension. It allows you to withdraw money flexibly while keeping the rest of your pot invested.
This option is typically used with defined contribution pensions. You choose how much to withdraw and when, which can help you manage your tax position over time.
The remaining pension stays invested meaning it still has the potential to grow (though, as with all investments, it also carries the risk of falling in value).
Drawdown can be a good option for those wanting to prioritise flexibility in how they access their pension. It can also work well if you're semi-retired or want to phase into your retirement gradually.
There are two main types of pension drawdown; flexi-access and capped drawdown. We dig into both below.
Flexi access drawdown
A flexi-access drawdown provides a flexible way to access your defined contribution pension.
This approach gives you full control over how much income you take and when. You can draw a regular income, occasional lump sums, or leave your pot untouched for periods of time, depending on your needs.
A flexi-access drawdown could be for you if you’re planning to lead something of a varied lifestyle in retirement – sometimes wanting regular income, and other times looking to take out a bigger lump sum or a particular venture or purchase.
Plus, if your circumstances or lifestyle goals change over time, you can adjust the money you take accordingly.
Wealthify offers flexi-access drawdown accounts with ready-made investment styles (from cautious to adventurous) designed to match your preferences. Find out more about this here on our Self-Invested Personal Pension page.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.
Capped drawdown
A capped drawdown pension is a legacy way for people to take an income from their pension pot while keeping the rest invested.
However, there is a limit – or “cap” – on how much can be withdrawn (this is to help protect the longevity of the funds in the long term).
This capped drawdown option was closed to new applicants in April 2015 but continues for those who already hold one. Under this arrangement, your pension stays invested, and you can draw an income within the government-set limit.
The cap is reviewed regularly based on the size of your pot and the rates set by the Government Actuary's Department. If you exceed the cap, your plan automatically converts to a flexi-access drawdown.
Capped drawdown may have suited people who wanted to retain the potential of investment growth, while still keeping access to their full annual allowance for pension contributions until the age of 75. However, it does lack the flexibility of more modern options, and most providers no longer support it.
For example, here at Wealthify we do not offer capped drawdown.
It’s worth noting, too, that other types of drawdown do exist. These include:
- Partial drawdown. This lets you use part of your pension to buy an annuity while keeping the rest invested.
- Phased drawdown. This involves gradually moving your pension into drawdown over time, allowing you to take smaller amounts as needed and spread your tax-free cash.
Pension annuity
A pension annuity is a product that converts your pension savings into a guaranteed regular income, usually for the rest of your life. It's a popular choice for those who want the security of a fixed income in retirement, safe in the knowledge that they won’t run out down the line.
You can typically take up to 25% of your pension pot tax-free before buying an annuity. This can be a good way to get hold of a larger chunk of money for anything you have planned during retirement – whether that be travel, milestones or a big purchase – whilst still knowing you’ll have assured regular income for years and even decades to come.
Annuities may be better suited to people who want certainty and don’t want to worry about investment risk or managing withdrawals. However, once purchased, an annuity usually cannot be changed or reversed.
There are several types of annuity to consider:
- Lifetime annuity. Pays a guaranteed income for life.
- Fixed term annuity. Provides an income for a set number of years.
- Enhanced annuity. Offers a higher income if you have certain health conditions or lifestyle factors.
- Joint annuity. Continues to pay an income to a partner after you die.
- Immediate needs annuity. Helps cover care costs in later life.
Choosing the right annuity is an important decision, and shopping around is essential. Wealthify does not offer annuities, so if this is of interest, you’ll need to look at other providers and see what’s on offer.
Annuity VS drawdown
Both annuity and drawdown pensions can provide a regular income in retirement, but they work in different ways and suit different needs.
An annuity offers security, while drawdown provides more flexibility. Here's a quick comparison to help you understand the key differences:
Pension annuities can work well for those wanting a stable, guaranteed income (and the peace of mind which comes with it).
Health can also be a consideration here, as you may want to think about life expectancy and how many years you’ll be needing an income for after retiring.
Of course, if you’re retiring later in life, it could be the case that you won’t make the most of your pension savings by purchasing an annuity. Alternatively, an annuity could end up paying out more than you have saved in your pot if you live for a long time after retiring.
Drawdown pensions, meanwhile, is better suited to those comfortable with investment risk and a flexible income. It can give you more wiggle room to take your retirement on your own terms, even if circumstances change.
You can also combine both options to meet different needs. For example, using an annuity to cover essential expenses and drawdown for added flexibility.
Wealthify offers drawdown pensions but not annuities.
Lump sum
Taking a lump sum from your pension lets you withdraw cash either all at once or in smaller amounts over time. This option is available from defined contribution pensions and can offer flexibility, but it does also come with tax considerations.
There are different types of lump sums.
The most common is the Pension Commencement Lump Sum (PCLS), which allows you to take up to 25% of your pot tax-free. You can do this in one go or in stages. If you take it in stages, 25% of each smaller withdrawal will be tax-free, with the rest taxed as income. This tax deduction applies to all smaller lump sums taken up to the value of 25% of your overall pot.
Another option is the Uncrystallised Funds Pension Lump Sum (UFPLS). This lets you take cash directly from your pot without setting up drawdown. Again, 25% is tax-free, meaning, as you’d expect, that the remaining 75% is still taxable.
This approach may suit those who need flexible access to their savings, want to manage tax efficiently, or have more immediate spending plans. However, it’s worth noting that taking large amounts early could impact your future retirement income and trigger a lower annual allowance for pension contributions.
This is why it’s important to think about what kind of retirement you’re planning for, not just early on, but further down the line, too.
Other options include small pot lump sums and trivial commutation (receiving your entire pension as a single lump sum) – but these may only be accessible in specific circumstances and can come with other considerations.
Remember, if you’re unsure what suits you, you can always reach out to a professional for financial advice (which we cannot provide here at Wealthify). Your tax treatment will depend on your individual circumstances, and it may be subject to change in the future.
Stay invested
Another option – (don’t worry, we’ve nearly covered them all!) – is to leave your pension pot invested when you reach the minimum retirement age. This means, rather than opting to take an income straight away, you’ll give your savings the opportunity to keep growing, potentially increasing the amount you’ll have available later on.
Staying invested gives you more time in the market, which could lead to greater returns depending on how your investments perform. This option can work especially well if you have other sources of income and do not need to take from your pension straight away.
However, it also comes with risks. Investment values can rise and fall, so there’s a chance your pension pot could shrink over time, especially if markets perform poorly. There’s also no income being drawn, so you will still need to plan when and how you will eventually access your funds when it comes to retiring fully.
Given the potential for compounding, staying invested could mean more growth potential. It also gives you flexibility to delay decisions, giving you more time to explore your withdrawal options in the future.
Make sure to regularly review your investment strategy, especially as your retirement plans and financial needs evolve.
Mixing pension options
Some pension providers allow you to mix how you take your pension, giving you the flexibility to suit your lifestyle and income needs.
This means you can use different parts of your pension pot in different ways, often at different times during your retirement, too.
For example, you might choose to use a portion of your pot to buy an annuity for a guaranteed income, while keeping the rest invested or taking occasional lump sums when needed. You could also combine drawdown with lump sum withdrawals, giving you a blend of regular income and access to cash as your circumstances change.
Mixing options can offer a balance between security and flexibility. However, it’s important to understand the tax implications of each approach.
Not all providers offer this mix-and-match flexibility, and some options are irreversible once set up.
Before making any decisions, check what your provider allows and consider speaking to a financial advisor if things get too confusing.
Which pension option is best for me?
No person’s retirement plans are identical to anyone else’s – and likewise, the best pension option for you will depend on your own unique circumstances.
With a Wealthify Self-Invested Personal Pension (SIPP), we provide flexibility over how and when you access your pension pot. The available options include:
- Uncrystallised Funds Pension Lump Sum (UFPLS)
- Pension Commencement Lump Sum (PCLS)
- Income
- Small pot lump sum (for pots under £10,000)
- Flexi-Access Drawdown (a mix of PCLS and income)
- Keeping your money invested
These choices mean you can tailor your withdrawals to suit your needs, whether that’s taking a regular income, accessing lump sums, or leaving your pension invested to grow.
With investing, your capital is at risk. Please remember the value of your investments can go down as well as up, and you could get back less than invested.
Wealthify does not provide financial advice. Please seek financial advice if you are unsure about investing.
Your tax treatment will depend on your individual circumstances, and it may be subject to change in the future.
