Taking your pension: your options at retirement, explained

Since 2015, people with defined contribution pensions have had almost complete freedom over how to take their money. Freedom is great — but it moves all the responsibility onto you. Here are the main options.

Tax-free cash (the technical name is "pension commencement lump sum")

You can usually take up to 25% of your pension pot tax-free, capped at a lifetime maximum of £268,275 across all your pensions (some people have protected higher amounts). The remaining 75% is taxable as income when you draw it.

You don't have to take all your tax-free cash at once, and for many people, not doing so is the smarter move — phasing it out over years can be far more tax-efficient.

Flexi-access drawdown

Your pot stays invested and you draw an income from it as and when you like. Maximum flexibility — you control the amount and timing, and anything left can pass to your beneficiaries.

The risk is equally clear: the money can run out. Draw too much, retire into a market downturn, or live longer than expected, and the maths can turn against you. Sustainable withdrawal planning — how much you can safely take each year — is one of the most valuable things a financial planner does.

UFPLS (taking lump sums directly)

Instead of formally moving into drawdown, you can take lump sums straight from your uncrystallised pot. Each lump sum is 25% tax-free and 75% taxable. It sounds similar to drawdown, and often the end result is similar, but the tax mechanics differ and one route can suit better than the other depending on your circumstances.

One quirk worth knowing: large one-off withdrawals are often taxed initially under an emergency tax code, meaning too much tax is deducted upfront and you have to claim it back.

Annuities

An annuity converts some or all of your pot into a guaranteed income for life. For years annuities were unfashionable because rates were poor; higher interest rates have made them genuinely worth a look again.

The appeal is certainty — the income arrives every month no matter what markets do or how long you live. The trade-offs: it's usually irreversible, and unless you build in death benefits, the income stops when you (and a surviving spouse, if selected) die. Enhanced annuities pay more if you have health conditions or smoke — always disclose everything, as poor health means better rates.

Mixing and phasing

You don't have to pick one option. Many good retirement plans blend them: perhaps an annuity covering essential bills, drawdown for flexibility, and tax-free cash phased over years to keep income tax bills low. This "phased retirement" approach — crystallising your pension in slices rather than all at once — is often the difference between an efficient retirement and an expensive one.

The tax point people miss

Everything beyond your tax-free cash is taxed as income in the year you take it. Take too much in one go and you can push yourself into higher rate tax unnecessarily — a 40% haircut on money that careful phasing might have got out at 20% or even 0%. The order and timing of withdrawals matters enormously.

This article is for general education only and isn't personal advice. Free impartial guidance on your pension options is available from Pension Wise (part of the government-backed MoneyHelper service). For personal recommendations on structuring retirement income, get in touch.