Taking your pension money – your options
Explore the different ways to take your pension money in retirement, including flexible income drawdown, lump sum withdrawals and annuities.
Withdrawing money from your pension is a major financial milestone, marking the reward for years of diligent saving. Now that you’re approaching retirement, it’s important to understand your options, so you can make decisions that work for you both now and in the future.
There are several ways to withdraw your pension, and once you make a choice, it’s not always possible to change your mind. Careful planning will help you select the option that best fits your needs and lifestyle. In this article, we explore the main ways to take money from your pension, so you can feel more confident in your choices.
Your pension withdrawal options
The main ways to access your pension money in retirement are:
- Use flexible income drawdown
- Take individual lump sums
- Buy an annuity
- A mixture of the above
Whichever option you choose, you can usually take up to 25% of your pension as tax-free cash, capped at £268,275 over your lifetime. Once you’ve taken your tax-free cash, you can’t put it back into your pension without triggering a tax charge. Further withdrawals will be taxed at your normal income tax rate.
The way your tax-free cash is paid, and what happens to the rest of your pension, depends on the withdrawal option you select. Let’s explore each one in turn.
1. Use flexible income drawdown
With flexible income drawdown, you decide how much income to withdraw and when. You can change this amount whenever you want to. If you retire gradually, for example, you might start by taking a smaller income to top up your salary and then draw a larger income once you retire fully.
The money left in your pension pot remains invested, giving it the opportunity to keep growing. However, investments can go down as well as up, so your pension might not last as long as you’d hoped if markets perform poorly.
Planning your pension withdrawals carefully can help to reduce the risk of running out of money. One approach is to start taking a fixed percentage of your pension each year, but you adjust that amount depending on how the markets perform. These adjustments can help to protect your pension from market downturns while also ensuring you draw enough money to sustain your lifestyle. At Vanguard, we call this approach ‘dynamic spending’. Find out more about dynamic spending and how it works.
2. Take individual lump sums
Another approach is to take a series of small individual lump sums (also called ‘uncrystallised funds pension lump sum’ or UFPLS) as and when you need them. Each withdrawal will be a mix of up to 25% tax-free cash (up to the £268,275 lifetime limit) and 75% taxable income. For example, if you have a £100,000 pension and take out £40,000, £10,000 is tax-free and £30,000 is taxable.
You might find this approach useful if you haven’t yet decided how to take your pension in the future.
Bear in mind that taking individual lump sums and drawing regular income will both trigger the money purchase annual allowance (MPAA), which reduces the amount you can pay into pensions and get tax relief to £10,000 a year.
3. Buy an annuity
An annuity is a type of insurance product that you buy with your pension or other savings. Lifetime annuities pay out a guaranteed income for the rest of your life. Fixed-term annuities pay out a guaranteed income for a set period; you can use all or part of your pension to buy the annuity and leave the rest invested. Annuities offer the security of knowing you have a guaranteed, regular income.
If you have an ‘escalating’ annuity, the income will increase in line with inflation or at an agreed amount each year. A ‘joint life’ annuity will pay an income to your spouse or partner after you die.
Once the annuity is set up, you can’t reverse your decision or change the amount of income to suit your needs. We don’t offer annuities at Vanguard, but if you want to buy one, we’ll transfer your pension to your chosen annuity provider.
4. Mix and match
You aren’t limited to just one option. Some people combine these different approaches to suit their circumstances. For instance, you could buy an annuity to cover essential expenses and use flexible drawdown for discretionary spending. You can adapt your withdrawals as your needs change over time.
As mentioned earlier, taking money from your pension is a big decision and it can be complex. You may wish to speak to a financial adviser before making any final decisions.
For more information on these options and how the process works at Vanguard, visit our dedicated page on withdrawing your pension money.
Investment risk information
The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.
Eligibility to invest in a Vanguard Personal Pension depends on your individual circumstances. Please be aware that pension and tax rules may change in the future and the value of investments can go down as well as up, so you might get back less than you invested. You cannot usually access your pension savings or make any withdrawals until the age of 55, rising to the age of 57 in 2028.
If you are not sure of the suitability or appropriateness of any investment, product or service you should consult an authorised financial adviser. Please note this may incur a charge.
Any tax reliefs referred to are those available under current legislation, which may change, and their availability and value will depend on your individual circumstances. If you have questions relating to your specific tax situation, please contact your tax adviser.
Important information
Vanguard only gives information on products and services and does not give investment advice based on individual circumstances. If you have any questions related to your investment decision or the suitability or appropriateness for you of the product[s] described, please contact your financial adviser.
This is designed for use by, and is directed only at persons resident in the UK.
The information contained herein is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so. The information does not constitute legal, tax, or investment advice. You must not, therefore, rely on it when making any investment decisions.
Issued by Vanguard Asset Management Limited, which is authorised and regulated in the UK by the Financial Conduct Authority.
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