Take taxable lump sums
You can use your pension pot to take lump sum payments when you need, to suit your needs and personal circumstances.
It is important that you consider the tax implications of taking lump sums from your pension pot as it could push you into a higher income tax band – see ‘What tax will I pay?’ below.
Use our pension tax calculator to see how much tax you may need to pay.
Please be aware that your existing pension is unlikely to offer this level of flexibility and you might need to transfer to another pension provider or into a different product if you want this option.
|Taking lump sums from your pension pot|
|You can take control of how you use your pension pot to suit your needs whether you want to retire fully or semi-retire. You can choose how and when you take payments from your pension pot and spread this over whatever time period you want.||Unlike a pension annuity which provides a guaranteed income for life, your pension pot may run out. This may be true if you take higher levels of payments in the earlier years or your remaining fund is affected by poor or low investment performance.|
|You can choose to use your remaining pension pot or any part of your pot to take an income at any time.||The amount of income you would receive is not guaranteed. charges may apply when you take an income.|
|The rates used in converting your pension pot into an income may change over time. So if you choose to take an income at a later date then the amount of income may be more or less than if you convert all your pension pot into a guaranteed income for life in one go.|
|If you want to continue to contribute to a pension and your contributions (including those of your employer and the tax relief you receive) exceed £4,000, you may incur an additional tax charge.|
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Different products will offer different features +
Certain products will allow you to take up to 25% tax-free cash on your whole pot upfront. If you do this, all future payments will be treated as taxable income. Other products will allow you to take up to 25% tax-free cash each time you take a payment and the rest is treated as taxable income.
If you change providers or take out a different product you will have to make new investment choices and different (possibly higher) charges may apply. The product provider may also insist on a minimum withdrawal amount, or a minimum amount that is required to be left in your pension to keep it open.
Taking an income
If you subsequently decide to take a regular income from part of your pot you may need to convert that part of your pot into an annuity.
What tax will I pay? +
This will depend on the type of product you choose.
Certain products will allow you to take up to 25% tax-free cash on your whole pot upfront. If you do this, all future lump sums will be treated as taxable income at your highest rate of tax.
Other products will allow you to take up to 25% tax-free cash each time you take a lump sum and the rest is treated as taxable income at your highest rate of tax.
If you have other income, you’ll need to plan carefully the amount of each lump sum you take, to avoid pushing yourself into a higher tax bracket.
If the value of all of your pension savings is above £1 million when you access your pot (2016-17 tax year) further tax charges may apply.
Tax relief on future pension savings +
Once you exercise the cash withdrawal option the amount of defined contribution pension savings on which you can get tax relief each year is reduced. If you want to carry on building up your pension pot this option may not be suitable. To find out more, see "Money Purchase Annual Allowance" and "Annual Allowance" in our jargon buster.
How else can I take my pension? +
You could consider securing a guaranteed retirement income. With this option, you give your pension savings to an insurance company and in return, they pay you a guaranteed income every year for the rest of your life. Learn more about pension annuities.
Alternatively, you could opt for a flexible income approach such as drawdown. With this choice, your pension savings are invested and you take an income from those. Find out more about income drawdown.
What happens if I die? +
If you die before age 75
Any untouched part of your pension pot will pass tax-free to your nominated beneficiary.
If you die age 75 or above
Your beneficiary will pay income tax at their marginal rate on any lump sum they take.