Accessing your pension pot
Before you start accessing the money in your pension pot it's important to think about your income options and where you can go for guidance and advice
Your retirement income options
When you reach age 55 (rising to 57 from April 2028), you can take some, or all, of your pot as a cash lump sum. Usually 25% of your lump sum will be tax-free and the remaining 75% will be taxed as income. Any money you leave will remain invested until you're ready to access your pot again.
If you had £10,000 in your pension pot, you could:
- take out all £10,000 in one go: £2,500 would be a tax-free lump sum and the remaining £7,500 would be taxed as income
- take £2,000 every year for five years: £500 of each £2,000 payment would be tax-free, and the remaining £1,500 would be taxed as income
- take £5,000 in one go: £1,250 of it would be tax-free and £3,750 would be taxed as income, leaving the remaining £5,000 invested until you need it
Flexi-access drawdown is one of the most flexible ways to access your pension savings. Most people can take up to 25% of their pot as a tax-free lump sum while the rest stays invested.
You can then take regular and / or occasional lump sums until your pot runs out. We won't charge you a fee for this but other providers might. Your pot will stay invested until you take the money out. If you want to change your investment funds, you can usually do this at any time, but you should check with your provider.
Keeping the money in your pot invested means it could benefit from extra investment growth. This will help to build up your savings while you're taking out an income. Just like any investment, its value can go down as well as up though. Investment growth will depend on performance, as well as other factors such as charges, the rate of inflation and how much money you take out.
When you take out money from your pension pot, it's important to think about:
- how much you'll need in the future
- whether your contributions are going to continue
- how charges could affect the value of your pot
- your investments performance
You can use some, or all, of your pension pot to buy an annuity. An annuity gives you a guaranteed income for life, or for a set number of years, depending on the type of annuity you buy.
Types of annuity
- A lifetime annuity pays you a guaranteed income for the rest of your life.
- A flexible annuity gives you the option to vary your income. You might choose a larger amount now, and a smaller amount later on.
- A fixed term annuity gives you a guaranteed income for a set number of years.
You can also choose for your payments to increase with inflation each year or to remain the same. Your payments can be monthly, quarterly or annually. You can also make sure your payments continue to your spouse, partner or other financial dependents after you die.
The money paid out from an annuity is taxable, and will vary depending on how much you have in your pension pot. If you smoke or have any health conditions, you might be eligible for a higher annuity income. It's important to shop around, and seek guidance or advice before you make any decisions.
Understanding your income and how it will be taxed
We've put together some case studies to help. A ‘personal allowance’ is the amount of money you can earn before you start paying tax. This is currently £12,570 for most people, including all of our case studies. These are the figures for the 2026/27 tax year, and they could change in the future.
Retirement income options | How will I be taxed? |
|---|---|
Take your money all in one go Liz is 61 and has decided that she would like to take all the money from her pension pot as cash. She doesn’t want to stop working yet, but has some debt that she would like to pay off before she starts planning her retirement. Here's what her retirement income would look like if she took all her pension savings in one go:
| Liz's job gives her an annual income of £18,000. If we add this to her pension pot of £37,500, this gives her a total income of £55,500 in one tax year. Remember, she has a personal allowance of £12,570, which brings her total taxable income to £42,930. The first £37,700 of her income will be taxed at 20% - the basic tax rate. £5,230 will be taxed at the higher rate tax of 40%. This means she will pay £9,632 in income tax this year. Liz has been taxed at the emergency tax rate. This means the amount of tax that has been deducted is more than £9,632, until a refund or adjustment is made. HM Revenue & Customs (HMRC) will refund the difference at the end of the tax year. She could apply for the refund sooner if she wants to. |
Take your money in a series of cash lump sums Ben is 59 and has decided to reduce his hours at work and start to slow down. He now works part-time, three days a week. His pension pot is worth £250,000 and he’s decided to take £10,000. He might take more next year if he reduces his hours again.
| Ben’s total taxable income is £12,930 which means he'll be taxed 20% on any other income he has. He'll have to pay £2,586 in income tax for the first year. Ben has been taxed at the emergency tax rate. This means the amount of tax that has been deducted is more than £2,586, until a refund or adjustment is made. HM Revenue & Customs (HMRC) will refund the difference at the end of the tax year, or he could apply for the refund sooner if he wants to. |
Take a flexible income (drawdown)
| David's total income each year is £24,547. After his personal allowance, his total taxable income is £11,977. This means he will have to pay £2,280 in income tax this year. |
Get a guaranteed income (annuity) Helen has decided that she’s ready to retire. Her pension pot is £150,000 and she’s decided to take 25% as tax-free cash (£37,500) to pay off some outstanding debts and take a long awaited holiday. She took some time before making a decision and has bought an annuity that’s right for her personal circumstances. Here's what her retirement income would look like:
| Helen's total income each year is £17,812. After her personal allowance, her total taxable income is £5,242 which means she will have to pay £1,048 in income tax this year. |
Other tax considerations
If you want to carry on contributing to your pension after you’ve started taking an income, the most you'll be able to pay in will be £10,000 each tax year. This is called the Money Purchase Annual Allowance (MPAA). You can't carry forward any unused MPAA from the previous year.
How much will you need in retirement?
If you have our app you can use our guided retirement planner to get a clear idea of what your retirement income might look like. We also have a useful tool to help you think about what your expenses might be.
Income tax explained
Learn how income tax works and how it might be applied to your retirement income options. Our pension tax calculator can also help you understand how much tax you might pay when you choose to access your pension savings.
Useful links
- If you want to learn more about two ways to fund your retirement, read our article on annuities vs drawdown
- If you're over 50, book an appointment with Pension Wise for free, impartial guidance
- It might be a good idea to speak to a financial adviser. If you don't have one, you can find one at Unbiased