How Do I Access My Pension?
Deciding when and how to access your pension is a big financial decision. There are a number of different options that you need to consider.
Accessing Your Pension
Deciding when and how to access your pension is a big financial decision. There are a number of different options that you can consider once you do decide to take income or lump sums from your pension.
It’s important to remember that you don’t need to have retired to take pension benefits- you can access your pension whilst you are working, as long as you are of normal minimum pension age (read more about this below).
We recommend that clients seek financial advice before accessing their pension, in order to understand the full financial implications of all available options.
Normally, the minimum age at which you can begin to take pension benefits is 55. Please be aware that this is due to increase to 57 from 2028.
You may be able to access your pension earlier if:
- You are unwell and unable to continue working
- You were entitled to a lower pension age from a pension before April 2006 and have maintained this ‘protected pension age’
What is drawdown?
Drawdown is one of the main ways of accessing your pension benefits. In drawdown, you keep your pension fund intact and take income payments directly from it. You can carry on investing the money in the pension and will benefit from any investment growth; however, if there is investment loss this directly affects the pension benefits available to you. You can choose to start and stop income payments at any time. This is considerably different from an annuity, which involves using your pension fund to buy a regular income, normally for life, from an annuity provider.
What is flexi-access drawdown?
Flexi-access drawdown is the newest type of drawdown and the only one available to new drawdown customers. It was introduced on 6 April 2015. There are no income limits for customers in flexi-access drawdown.
For more information about drawdown, including how this may impact any lifetime allowance protection you may have, please see here.
What is capped drawdown?
Up until 6 April 2015, this was the most common form of drawdown. In capped drawdown, individuals receive a maximum income limit which restricts the amount of income available each year, in order to minimise the risk of the pension fund running out during the individual’s lifetime.
It’s no longer possible to begin a new capped drawdown plan, but you may still have funds in capped drawdown which began before 6 April 2015.
How is drawdown income taxed?
Any income you take, whether from capped or flexi-access drawdown, is subject to income tax. When you take your first income payment from a particular provider, they have to use an emergency rate tax code, unless you can provide evidence of your tax code such as a current P45. Emergency tax codes assume that the payment will be the first of a regular series and make assumptions about factors such as your personal allowance, so they can result in you overpaying or underpaying tax.
Once the first payment has been made, HMRC will send your provider your tax code to use for future payments. If you are beginning to take a regular income, this tax code will normally correct any over or underpayment from the first income payment. If you took a single income payment, HMRC may write to you at the end of the tax year to return any overpaid tax, or request money from you if you underpaid. Alternatively, you can contact HMRC during the tax year to correct any problems.
You don’t normally have to access all of your pension funds at the same time. You will normally be able to choose how much of your pension you would like to access, and how much you would like to leave for a later date.
PCLS, which is often known as ‘tax free cash’ or a ‘tax free lump sum’, is a tax free payment which normally equates to 25% of the value of the pension benefits being accessed. You don’t need to access all of your PCLS entitlement at once, but will need to access at least a portion before you can begin taking pension income. PCLS is subject to available lifetime allowance- you can read more about the lifetime allowance here.
For more information about PCLS, including when you can take this and how taking PCLS may be affected by protected lifetime allowance, please see our PCLS page here.
A UFPLS is a way of taking benefits from your pension. It was introduced on 6 April 2015. Part of a UFPLS will typically be free of tax and the remainder is subject to income tax. Unlike going into drawdown, a UFPLS payment doesn’t allow you to take the tax free element up front and leave the taxable element for a later date: it is a single lump sum payment.
For more information about UFPLS, including eligibility criteria and how taking UFPLS may affect protected lifetime allowance, please see our UFPLS page here.
An annuity gives you a regular, guaranteed income for your retirement. Annuities can be purchased for a fixed number of years, or for the rest of your life and are purchased from authorised insurance companies.
You can find out more about the different types of annuities, and how they work on the Moneyhelper website.
The MPAA is a variation of the annual allowance rules which was introduced in April 2015. If you want to learn more about the annual allowance rules, please read our Annual Allowance fact sheet.
People affected by the MPAA still have to test all of their pension savings for the year against their annual allowance as normal. However, they also have to test the value of their money purchase contributions against the MPAA.
The following actions, known as ‘trigger events’, are the main ways to cause the MPAA to take effect:
- Taking income from a flexi-access drawdown fund
- Being in flexible drawdown before 6 April 2015 (automatic MPAA trigger on 6 April 2015)
- Taking an uncrystallised funds pension lump sum (UFPLS)
For more information on any of these terms, please read the applicable fact sheet.
There is no requirement to consult a financial adviser in order to access your pension benefits, however we strongly suggest you seek advice from an FCA authorised financial adviser before making any significant decisions regarding your pension and future retirement planning.
If you decide to access your pension benefits without consulting an adviser, your provider is required to ask you additional questions about your circumstances and investment decisions and, based on your responses, issue warnings about risks which may apply to you. You’ll then be asked to confirm that you understand these risks and are happy to proceed. Your answers won’t affect the options available to you – the process is simply intended to check that you have carefully considered the possible risks of your choice.
If you do not wish to obtain financial advice when accessing your pension, you may wish to consult Pension Wise, which is a free, impartial guidance service backed by the UK government. Under current rules, you can get a Pension Wise appointment with one of their pension specialists if:
- you’re aged 50 or over, and
- you have a UK based defined contribution pension pot (this can be a personal or workplace pension)