27/10/2025
Four questions that retirement specialists hear -
There are multiple options if you're approaching retirement and looking to access your pension savings.
Those options mean you have the flexibility to shape your retirement income to suit you - but they also mean you have many decisions to make. After saving hard for years, now comes the job of turning your retirement savings into an income.
If you’re confused or have questions about how to do it - don’t worry, you’re not alone.
Here are four questions many clients are asking, along with some answers -
1. What income options are available?
There are various ways you can turn your pension pot into an income. ‘Drawdown’ (sometimes called flexible retirement income or flexible access) is increasingly popular - this is where your pension pot remains invested and those investments are managed in a way that produces a flexible income. You can normally take up to 25% of your pot as a tax-free lump sum straight away or in stages, with drawdown income after that subject to Income Tax.
An annuity is another option. It is a product that turns pension savings into guaranteed income. The deal is that you hand over a pot of money and an annuity provider will pay an agreed level of income for the rest of your life.
That makes it different to drawdown - which leaves your money invested instead, with an income generated by investment returns, dividends and interest from bonds.
Each method has benefits and drawbacks. Annuities offer income that is guaranteed, no matter what markets do, but the money you use to purchase an annuity no longer belongs to you. Money invested in drawdown, on the other hand, is still yours but the income you get depends on investment returns, so can fluctuate - it is not guaranteed, and there’s also a risk that you could run short of money in later retirement if you take too much early on.
Finally, there is the option to leave your money in your pension pot and take lump sums from it as and when you need. The technical name for this is Uncrystallised Fund Pension Lump Sum (UFPLS). When taking lump sums like this, 25% of each withdrawal will be tax free, 75% will be taxed as earnings.
Thankfully, you don’t have to choose just one of these options - you can mix these together to suit your retirement goals.
2. Should I take tax-free cash?
From age 55 (57 from 2028) - many years before most people will actually stop work - pension rules normally allow as much as 25% of the value of a pension pot to be withdrawn without Income Tax to pay. The attraction of tax-free cash is clear, but taking it isn’t always the right call. With a quarter of your pension pot generally at stake – a pot that’s there to support you for the rest of your life – it’s important to take tax-free cash in a way that suits you best.
If you don’t have a very good use for the money right now, be aware that taking the money from your pension only to let it sit in a bank account could come at a cost.
Once it’s in a bank account, any returns it earns could be subject to tax, whereas it would have grown tax-free in your pension. You may be able to re-home your tax-free cash inside an ISA to avoid this, but what you can pay in is limited, currently to £20,000 a tax year.
You don’t have to take all of your tax-free cash at once. If your pension scheme supports it, you can access only part of your tax-free cash and keep the rest invested for later. This means you can continue to grow more tax-free cash for the future.
3. What happens to my pension when I die?
If you die before the age of 75, anything in your defined contribution pensions can be passed on to anyone you wish and the recipient won’t have to pay income tax on it, as long as this is done within two years of the date of death. You can express to the company running the pension who you would like to benefit in case you die.
Money held in a pension is not normally part of your estate, so no inheritance tax is currently due when it is paid out from the pension (although this is due to change from 6 April 2027).*
For funds still within the pension at death, beneficiaries can withdraw some or all of it, or take an income as if it were their own pension. They don’t have to be of pension age to get the money.
If death occurs after age 75, then the money withdrawn is liable to Income Tax at the recipient’s marginal rate.
*Please note that the UK Government has announced that from April 2027 it is their intention for unspent pensions to be included in the calculation of the value of estates and could therefore be subject to Inheritance Tax.
4. Can you contribute to a pension after taking money out?
Once you begin withdrawing taxable money from your pension - if you enter drawdown, for example - generally you will be subject to the money purchase annual allowance (MPAA). The MPAA reduces the amount that can be contributed to your money purchase pensions in any one tax-year while still benefiting from tax relief to £10,000 (compared to the standard annual allowance of £60,000). If your taxable earnings in the year are below the MPAA then tax relief on money purchase pension savings is limited to 100% of your earnings (or to £3,600 if you have no earnings).
Just taking your tax-free cash or using your pot to buy a guaranteed income for life (an annuity) doesn’t count as taxable income for this purpose but taking a lump sum as an Uncrystallised Fund Pension Lump Sum (UFPLS) does.
You cannot normally access your pension savings until age 55 (57 from 2028). Tax treatment depends on individual circumstances and all tax rules may change in the future.
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Please note that the value of investments and the income from them can go down as well as up, so you may not get back what you invest.
The above notes are for general information only and are not to be considered as financial advice.
