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How to manage your pension pot in retirement

From taking a tax-free lump sum to drawing an income from your pension, there are different ways you can access your money.

When you get closer to retirement, your pension provider will send you details of your options, which may include:

Take all your pension in one go

One option is to take your entire pension pot in one go as one lump sum.   

Your pension pot is the total amount of savings you and your employer (if employed) have built up over time, to fund your retirement. This could be through private pensions, workplace pensions or both. It doesn’t include your State Pension or any ‘final salary’ pensions you may have.

Usually, the first 25% will be tax-free and the remaining 75% will be taxed as earnings. It allows you to use the money as you wish, but it’s important to take guidance from MoneyHelper or to take professional advice. 

Emptying your pension in one go could mean you pay more in tax and leave you short of money in the future. You should also check the terms and conditions of your pension policy to understand if there are any fees or charges for doing so.

Take a number of lump sums from your pension

Another option is to take money from your pension pot in several lump sums as and when you need it. Each time you take a lump sum of money, 25% is tax-free and basic rate income tax is deducted from the remaining 75% before you receive it. The money you don’t withdraw from your pension stays invested.

Taking smaller lump sums over time can help you manage your income, while your remaining pension fund has potential to grow. However, there are no guarantees – the value of your pension pot can fall as well as rise. 

Keep in mind – not all providers offer this option, and some may limit how much you can take out. There may also be a fee every time you take a lump sum, so it’s worth checking your policy. 

Draw an income from your pension

What is pension drawdown?

Pension drawdown – or Income drawdown – is a way of getting 25% of your pot as a tax-free lump sum and a regular pension income when you retire, while allowing your pension fund to potentially keep on growing. 

You can change the amount you draw from your pension and when its paid. And if you decide income drawdown isn’t right for you, you can take different retirement options. The remaining fund can also be passed onto your spouse or other beneficiaries when you die and there is no inheritance tax to pay on your pension pot. 

Keep in mind – while investments can go up in value, your income isn’t a guaranteed amount, and you could get back less than you invest. There may also be fees to pay. 

Explore: Investing for an income in retirement

Buy an annuity for a guaranteed income

What is an annuity?

An annuity is a way to turn part of your retirement savings into a guaranteed income for the rest of your life or a fixed term, as well as take 25% as a tax-free lump sum. 

Some pension providers offer annuities. However, you don’t have to take the annuity they offer – it usually pays to shop around. 

Buying an annuity means you’ll always have a guaranteed level of income no matter how long you live. However, they are less flexible than other options. For example, you can’t choose to take more (or less) income for a period, or switch to another plan or provider. 

Once you buy an annuity – you can’t change your mind, so it’s important to make sure it’s right for your situation.

Mix and match your retirement options

Depending on the size of your pension pot, you also have the option of choosing more than one retirement option. For example, you could buy an annuity with some of your pension (for a guaranteed income) and leave the rest in case you need a flexible income or cash lump sum. This can help you achieve the retirement lifestyle you’re planning for.

Everyone’s circumstances are different. It’s important to consider each option carefully, including the amount of tax you would pay and any fees or limitations in your policy. 

Leave your pension pot alone until you need it

Although you can access your pension pot from the age of 55 – or 57 from 2028 – it’s normally best to leave it alone until you retire. You can always leave your money invested. When the time is right, you can look at your retirement options. 

Keeping your money invested will give it a chance to grow, but you’ll need to let your pension provider know if you want to delay your retirement. Again, there are no guarantees, and your pension can go up or down in value. 

Will taking money from your pension affect your benefits?

Withdrawing money from your pension might be counted as income or capital. This may affect a means-tested benefit, such as Pension Credit, and your eligibility to make a claim in the future. 

Explore: What benefits can you claim?

Do you pay tax on your pension?

You’ll need to pay tax on your pension income if your total annual income is more than your Personal Allowance. The standard Personal Allowance for the current tax year (6 April 2023 to 5 April 2024) is £12,570.

Your total income could include:

  • your State Pension
  • a private pension (workplace or personal)
  • earnings, if employed or self-employed
  • taxable benefits
  • any other income, such as from investments or savings

Keep in mind – you can usually take up to 25% of your pension pot tax-free, which doesn’t affect your Personal Allowance. Tax rules can change, and any benefits will depend on your individual circumstances.

For more information, visit GOV.UK: Tax when you get a pension.

Help and support

If you’re aged 50 or over, you can get free, impartial guidance from Pension Wise.

Pension Wise is a government-backed service from MoneyHelper to help you understand your retirement options.

Visit MoneyHelper: Welcome to Pension Wise.