How can you take money from a pension plan?

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How you take your pension savings is a big decision. So let’s look at your options. 

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Got a defined contribution (‘money purchase’) pension plan? This is the most common type of pension plan nowadays. If you have one of these, there are different ways you can take your pension savings when you’re ready. And you choose how you do it. Keep in mind not every option is available with every provider or pension product, and the option(s) that's right for you may not be right for everyone.

No matter which option(s) you go for, you can usually take up to 25% of your pension pot tax-free. You can take this all at once, or you may be able to take it bit by bit. But there’s something called the ‘lump sum allowance’. This means the most you can take tax-free across your pension plans is £268,275, unless you have specific protections in place. 

You can take your pension savings from the age of 55 (rising to 57 from 6 April 2028).

Your options – an overview

Drawdown

Pension drawdown (or a ‘flexible income’) lets you take your pension savings whenever you want. You decide how much you withdraw. Anything left in your plan stays invested.

With drawdown, you could set up a regular income. For example, you might want the same amount each month. Or you could take money as and when you need to. 

Your money isn’t guaranteed to last for as long as you need it to. The value of your investments can go down as well as up and, depending on how much you take and how your investments perform, you could run out of money.

If you’re going for this option, you could take 25% of your pot tax-free in one go (capped at £268,275) and move the rest into a drawdown pot. Or you might be able to take your tax-free allowance in smaller chunks, depending on the pension product you have. To learn more about how this could work, you can read our drawdown article.

Annuities

You can buy an ‘annuity’ with some or all of the money in your pension pot. This gives you a guaranteed income for the rest of your life or for an agreed period. 

You can add features onto an annuity. For example, you might choose to add a feature that makes your annuity income go up each year rather than being a fixed amount.

You can choose how often you get your annuity payments (monthly or yearly, for example). But you can’t usually change how much you get or when you get it once you’ve bought an annuity.

How much income you can get depends on lots of things, including features you've added on, your age, and your health and lifestyle. And it can vary from provider to provider, so it's important to shop around.

Remember, you could take your tax-free allowance and buy an annuity with what’s left in your pension pot. 

Lump sums

You can take lump sums from your plan, or all of your money at once. You decide how much to take and when to take your savings. Money left in your pot stays invested.

There are no guarantees as to how long your money will last. Your pot’s value can go down as well as up, and you could run out of money if you take too much too early. 

If you’re taking your whole pot as a lump sum, 25% will usually be tax-free, up to that £268,275 cap. If you take multiple lump sums, 25% of each sum is usually tax-free (so if you took £5,000, £1,250 usually wouldn’t be taxed).

Can you choose a combination of options?

You could go for a combo of different options.

For example, you could buy an annuity with some of your pension savings and have the rest in drawdown. 

Some people choose to buy an annuity in stages (i.e. use some of their pot to buy an annuity, wait a few years, and repeat), and keep the rest of their pension money in drawdown. This can give you peace of mind that some of your income is guaranteed, while still giving you flexibility and the potential for investment growth.

Does each option involve income tax?

Yes, you’ll usually need to pay income tax on anything over your tax-free allowance. Taking money, especially large lump sums, could push you into a higher tax bracket. And in some circumstances, you could face emergency tax. Find out more in our article.

Does each option let me pass my pension savings on?

If you buy an annuity, you might be able to pass this on – but only if you add on a feature that lets you do this. For example, an annuity may be able to provide for your loved ones if you've opted for a spouse or dependants' income. You can learn more in our article. 

With drawdown or lump sums, you can usually pass on what’s left in your pot. 

Who can I speak to about my options?

You’ll need to think carefully about what’s right for you. You might not even feel ready to take your pension savings yet, in which case you can usually just leave them invested.

When taking your money, you can stay with your current provider or move your pension savings to a different one. Remember, different providers may offer different levels of income (if you’re buying an annuity) and different options. So it’s important to shop around for the provider that’s right for you.

Pension Wise, a service from MoneyHelper, offers free impartial guidance to over-50s about their options. 

It might be worth talking to a financial adviser. You can find one at Unbiased. 

Thinking of taking your money soon? If you’re a Standard Life customer and you want to know more about your options, find out how you can get in touch with us.

 

The information here is based on our understanding in April 2024 and shouldn’t be taken as financial advice.

A pension is an investment and its value can go down as well as up and may be worth less than was paid in.

Your own personal circumstances, including where you live in the UK, will have an impact on the tax you pay. Laws and tax rules may change in the future.

Standard Life accepts no responsibility for information in external websites. These are provided for general information.