Your pension options

If you're 55 or over and have a defined contribution pension (also known as money purchase), you can access your pension pot in a number of different ways.

What are my options?

You can choose from the following options or mix and match. Not all pension schemes or providers offer the same options - make sure you shop around before making any decisions.

1. Leave your pension pot invested

You don't have to use the money in your pension pot as soon as you reach retirement age. You can choose when to start using it. If you don't need your pension income now you can leave it where it is, which may give it more time to grow.

Not all providers offer the same options, so you should check carefully before deciding what to do and get financial advice if necessary. The value of anything you leave invested can go down as well as up, depending on how it performs. Also, some of the choices you make now may be irreversible, and that could affect your retirement income for the rest of your life.

2. Take an income from your pension

Once you reach retirement age, you can choose to use some or all of your pension pot to buy a product that pays a regular income. There are many ways to do this, you can choose from the full range of retirement products and options offered by all providers. Depending on your circumstances, health and lifestyle, you may be able to get a better deal elsewhere.

The main options are:

Pension income options
Product Description
Flexible income drawdown
  • Flexible income drawdown, also known as Flexi Access Drawdown, allows you to withdraw funds from your pension pot. You can take any amount of income without restriction while leaving the remaining funds invested.

  • You can usually take 25% as a tax-free lump sum when you first decide you want to go into drawdown.

  • Any payments will be taxed in the same way as earned income.

  • The income is not guaranteed as it’s flexible and once it’s gone it’s gone.

  • As your money remains invested, it's value can rise or fall depending on how the investments perform. This may mean that you need to reduce your income if investments perform poorly.
Lifetime annuity
  • You can use your pension pot to buy a lifetime annuity, which provides you with a guaranteed amount of money for the rest of your life.

  • The level of income you receive will depend on the size of your pension pot, your age, lifestyle and your health.

  • An enhanced annuity may pay you more money if you have certain health and lifestyle conditions. For example diabetes, smoking, high blood pressure, cancer or kidney disease could mean you qualify for a higher income each year. Let your adviser (if you have one) and any providers know about your health and lifestyle so that they can give you accurate quotes that reflect your personal circumstances.

  • You can choose from lifetime annuities or investment-linked annuities, which will offer different monthly or yearly income.

  • You can normally take up to 25% of your pension pot as a tax-free cash lump sum and use the rest to buy a lifetime annuity. The income you receive will be taxed in the same way as earned income.

  • There are a number of options available to you when choosing to buy an annuity. Not all providers will offer every option, so it's important to shop around.

Fixed term annuity

  • A fixed term annuity provides you with a regular retirement income for a set period of time. You may also be given the option to receive a lump sum payment at the end of the term, known as a maturity amount.

  • Depending on the type of fixed term annuity, when you buy one you can choose the level of income you want and the maturity amount you'll need at the end of the term. If a maturity amount is included, at the end of the term you can use it to buy another retirement income product, such as another fixed term annuity or a lifetime annuity, or you can take the money.

  • Fixed term annuities can be very flexible, allowing you to keep your options open by receiving an income without locking into a product like a lifetime annuity. If you have chosen a product with a maturity amount, when the term ends you can shop around for the best product available for you.

  • If you're looking to take your pension pot as cash, a fixed term annuity can help you do this in a way that may result in you paying less tax than if you took it all at once

  • The main risk is that when you get to the maturity of your fixed term annuity, that market conditions have worsened and you cannot achieve the level of income that you need.

  • There are a number of options available to you when choosing to buy an annuity so you should make sure you shop around.

3. Take all your pot as cash in one go

Once you reach retirement age, you can choose to withdraw as much or as little cash from your pension pot as you want. The first 25% will be tax-free and the rest may be taxed as income.

Think carefully before you do this. It may be tempting but remember, what you decide now could:

  • Result in a large amount of tax being deducted before we pay you your withdrawal.
  • Reduce your entitlement to any income-related state benefits you are already receiving.

If you choose this option, it will affect your retirement income for the rest of your life, and the choice you make could be irreversible.

"Cashing in your pension pot will not give you a secure retirement income. Get guidance from Pension Wise followed by financial advice before you commit."
- Money Advice Service

4. Take cash from your pot in stages

You can take cash from your pot in stages – the first 25% of each cash withdrawal will be tax-free, the rest will be taxed as income. By taking it in stages, you may be able to access your money more tax efficiently.

Withdrawals directly from your pension

  • The money you leave invested in your pension pot could rise or fall in value depending on how investments perform.

  • This option won’t automatically provide a regular income for your spouse, registered civil partner or dependent after you die.

  • Once your pension pot is exhausted, it is gone for good. It's vital that you ensure your money lasts. Get free guidance from Pension Wise  followed by financial advice before you choose this option.

5. Combine your options

You can combine the above options so that your overall solution meets your individual circumstances and needs as closely as possible. Whether that’s taking advantage of tax-free cash, leaving part of your pension pot invested or purchasing a regular income, it’s up to you.

What else do I need to know?

The information on this page is general, and not all of these options are available on all pension products. You'll need to contact your pension provider to find out what options are available under your plan. If you have a Legal & General pension, we can send you a pack with details of the options specific to your plan.

For more details, please see How can I access my Legal & General pension pot?

It's an important decision and with some options, once you've chosen them, you can't change your mind later. You'll need to consider any implications for the tax you pay and any state benefits you receive. You also need to ensure that you have enough retirement income to live on.

Next steps

Case studies

Our case studies illustrate the different options available and important considerations.