Take them as cash
You can take some or all your pension savings as a cash lump sum. You’ll have complete freedom to use the cash as you like (except you can’t put it back into a pension).
But, you could pay a lot of tax by doing this. Only a quarter of the cash you take is tax-free – you pay tax on the other three-quarters. Depending on your circumstances, this could put you into a higher tax bracket for the year, meaning you pay even more tax.
Also – once you’ve taken all the cash, what will you live on? Do you have other retirement savings you can use instead?
Buy a pension
You use some or all the money in your pension savings to buy a pension income. You do this by buying a policy called an ‘annuity‘ from an insurance company. This gives you a guaranteed income for the rest of your life. You can take up to a quarter of your pension savings as tax-free cash before you buy your annuity. You would pay income tax on your pension income in a similar way to other income.
Annuities come with a range of choices, such as an income that increases or starts at a higher level but doesn’t increase. You can choose an annuity that includes a pension for your husband, wife or civil partner if you die before they do.
It’s important to realise you can’t change the terms of your annuity once it starts to be paid. What’s more, annuities have been getting more expensive, so you may not be able to afford as much yearly income as you would like. The later in life you buy your annuity, the more income you’re likely to get. Also, the costs of annuity policies vary between insurance companies – so it’s important to shop around to find the best price for the type of annuity you want.
Take an adjustable income or ‘drawdown’
You’ll need to transfer your pension savings out to another pension provider if you want to do this. We don’t charge you to transfer your pension savings out. See our Transfers FAQs section.
You can take up to a quarter of your pension savings as tax-free cash before using the rest for drawdown.
You would pay income tax on the money you take out in a similar way to other income. You might be able to limit the amount of tax you pay by being careful about how much you take out each year.
With drawdown, you have complete freedom and flexibility to take money out whenever you want to – but you also have total responsibility for managing your money. You’ll need to keep investing your pension savings and the value of investments can go down as well as up. And you could run out of money altogether.
Having said that, you don’t have to keep on using drawdown for the rest of your life. You could do drawdown for a while and buy an annuity later on to give you a guaranteed income.
We don’t offer annuities or income drawdown products. If you’re interested in either of these options for your retirement, you should take independent financial advice about what would work best for you.