Cashing in your pension

It might seem like a far off prospect but knowing how you can access your pension pot can help you understand how best to build for the future you want.

The key thing to know is that from the age of 55, if you have a defined contribution pension1, you have the choice how to take your pension.

You've got a whole new world of options when it comes to what to do with your pension in retirement.

Lots of choice can often mean increased confusion, so here’s an at-a-glance view of your options. We’re not recommending one over the other, but we can support you when the time comes to make your decision.

(For a more in-depth view of each of the options, with examples and numbers, you can also explore our Approaching retirement section.)

Each option has its own upsides, downsides and tax implications. It depends on what you want out of life, how you choose to live and how much you want to leave behind.

With all of the options, you can normally take up to 25% of your pension pot as a tax-free lump sum if you wish to do so. The rest will be taxed as an income as and when you receive it, so look at the tax implications of each option carefully.

So what are your options?

You can use your pension pot to buy an income for life. It pays you an income and is guaranteed for life. These payments may be subject to income tax.

In most cases you can take up to 25% of the money you move into your guaranteed income for life, in cash, tax-free. You'll need to do this at the start and you need to take the rest as an income. Check out these annuity tips before you buy.

In most cases you can take out up to 25% of the money moved into your flexible cash or income plan, in cash, tax-free. You'll need to do this at the start. You can then dip into the rest as and when you like.

You can also set up a regular income with this option. Any money you take after the first 25% may be subject to income tax. You can invest the rest in whichever fund or funds you choose, giving your money the chance to grow. Although as with all investments, it could go down in value too and you could get back less than you put in.

You can do this all in one go, or as a series of smaller lump sums, whilst the rest remains in your pension fund.

If you opt for smaller lump sums without taking your tax-free cash up front then each payment will be 25% tax-free. The remainder will be added to your income for the year and taxed accordingly.

This may result in you paying a higher rate of tax.

You don’t have to choose one option – you can take a combination of some or all of them over time, even if you’ve only got one pension pot.

Before combining any options though, take time to think about the benefits and considerations of each option on its own. Check with your providers to see that you’re not losing out on any guarantees on your plan by combining options.

If you don’t need to take any money out, you can leave it in your pension pot to give you more time to decide what to do with it, or give your pot a chance to keep growing - but while it’s invested, it could go down as well as up in value and you might get back less than you put in.

And if you’re still paying into your plan you can keep paying into it and potentially benefit from tax relief. You can then choose how to access your money, when the time is right for you.

If you do decide to do nothing, we would recommend you review your terms and conditions or speak to your provider.

Some other things to think about

When deciding what to do with your pension pot, it’s important to remember that each option might have different tax implications and pension providers offer different products with alternative options or features (including the product terms, rates, funds or charges) that might be more appropriate for your individual needs and circumstances.

This is why it’s important you should shop around – so that whatever you decide to do – whether that’s a guaranteed income for life (also known as an annuity), flexible cash or income (also known as drawdown) or something else, it’s the right decision for you.

For some products, like annuities, it’s important to shop around so you can get the highest possible income. Yours or your partner’s health and lifestyle can increase the amount of income you or your partner can get. Different providers might use different criteria to assess yours or your partner’s health and lifestyle conditions. 

This is known as an enhanced annuity. Prudential do not offer enhanced annuities but you might qualify for an enhanced annuity with another provider and get a higher income. That’s why it’s very important that you should shop around.

We recommend you use Pension Wise, a free, impartial guidance service offered by the Government to help you understand your retirement options. You can speak to them on 0800 280 8880, and book an appointment to meet someone in person. You can also speak to a financial adviser.

If you're a member of an occupational pension scheme2, the options available to you may vary, so please contact your scheme administrator. We always strongly recommend that you take financial advice. If you have a pension with guaranteed benefits of £30,000 or more and are looking to convert it to a flexible option such as taking the whole pension as cash or a flexible income, you may be required by legislation to show us evidence that you’ve taken advice before we can progress your request.

In addition, if you want to transfer out of a defined benefit scheme3 you are also required to take financial advice.

1 A company pension scheme where the contributions made by the employer and employee are set and the final pension an employee receives depends on a number of factors including the size of their fund on retirement. This final fund is then used to buy an annuity or an unsecured pension (income drawdown). These are also referred to as money purchase schemes.

2 A pension scheme provided (sponsored) by an employer for its employees; Occupational pension schemes can be defined benefit schemes (final salary schemes) or defined contribution schemes (money purchase schemes).

3 A company pension scheme where the pension an employee receives is linked to their length of scheme service and size of their salary as defined in the scheme rules. They are often referred to as final salary schemes.

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