What pension options do I have?

If you've saved into a defined contribution pension scheme during your working life, you need to decide what to do with the money you've saved towards your pension when you retire. 

What is a pension pot?

Your pension pot is the total amount of pension contributions that you and your employer have made to save for your retirement. Your pot also includes any capital growth earned from the fund’s investments, depending on how your scheme was set up.

Your pension pot doesn’t include your State Pension. This is provided by the government.

Your fund should send you a pension statement once a year that tells you how much your pension pot is worth, or there may be an option to check this on their website.

If you’ve made pension contributions into multiple different pension schemes then you’ll need to contact each fund separately for a statement.

When can I withdraw money from my pension pot?

You must have reached a certain minimum pension age to access your pension pot – this is usually 55 years.

You may be able to withdraw your pension earlier if you’re disabled or seriously unwell, but the rules depend on your pension scheme.

Beware of pension scams as you're nearing pension age. Criminals are more likely to approach you to try and convince you to withdraw or invest. They may falsely claim that you can access your pension before you’re 55.

How can I use my pension pot?

It's completely up to you how you choose to use your pension pot, based on what best suits your needs. Each option comes with its own set of rules, fees, benefits, risks and tax issues.

Deciding what to do with your pension pot can be complicated – there are many factors to consider and financial terms to understand. 

You don’t have to rush into anything. It's a good idea to take some time to consider all of your options so that you don't end up in a situation where you’re unable to use your pension pot money, or the money has run out. Think about your:

• lifestyle
• partner or family
• age
• long-term health and life expectancy
• current and future care needs
• other sources of income.

Not all pension schemes and providers will offer every option. Talk to your pension fund provider to find out what’s available. Your options may include:

• doing nothing – leave your money invested in your pension scheme
• withdrawing some or all of your pension pot as a cash lump sum
• buying an annuity
• investing part or all of your pension onto the stock market (this is known as 'income drawdown')
• a mix of these options, depending on the size of your pension pot.

It's a good idea to seek advice from a regulated independent financial adviser before making any decisions and consider all your options carefully.

What do I need to consider with cash withdrawals or lump sums?

You could close your pension pot and take the whole amount as cash in one go if you wish – this is called a lump sum. Or you could treat your pension pot like a bank account and make several withdrawals when you need to.

There are some things you should bear in mind before taking out a cash withdrawal or a lump sum, such as: 

• not all pension providers can handle cash withdrawals
• there may be high fees or charges for each withdrawal
• there may be high tax charges because only 25% of each withdrawal (or of your lump sum) is tax-free – the remaining amount is taxable and this may push you into a higher tax bracket
• there may be a maximum limit on the number of times you can make cash withdrawals.

What do I need to consider with annuities?

An annuity converts your pot into an annual pension, giving you a guaranteed income for life or a specified period.

Regardless of your pension provider, you can buy your annuity from any provider you wish. It's important to shop around and get personalised quotes from a few providers to make sure you’re getting the best deal.

There are some things to bear in mind for annuities, such as:

• once you’ve purchased an annuity and decided on the income you wish to receive, you can’t change your mind and switch to another plan or provider
• the annuity may not be flexible (for example, you may not be able to increase your income in future because of the increased cost of living)
• some providers require a minimum amount to purchase their annuity
• annuity rates can decrease or increase based on the stock market or economy.

Find out more about annuities 

What do I need to consider with income drawdown schemes?

In a drawdown scheme, you transfer some or all of your pension pot into a scheme, which is then invested in the stock market. You can draw income from your investment and there are no restrictions on the amount you can take.

There are some things to bear in mind for income drawdown, such as:

• fees may be expensive
• your income isn’t a guaranteed amount
• without a maximum limit on how much you can withdraw annually, you could run out of money
• your investment can decrease or increase based on the stock market or economy.

Will taking money from my pension pot affect my benefits?

How you use your pension pot can affect any benefits you currently receive or your eligibility to claim a benefit in the future. This is because withdrawals or investments may be counted as income or capital, which may affect means-tested benefits.

Means-tested benefits include:

• Pension Credit
• Housing Benefit
• Council Tax Support
• Income Support
• Income-based Jobseeker's Allowance
• Income-related Employment and Support Allowance

If you spend or give away money (including tax-free cash) from your pension pot to get or increase your benefits, the Department for Work and Pensions (DWP) or your local council may re-assess your eligibility and treat you as still having that money.