What is a crystallised pension?

Find out about crystallised pensions, what they are and what happens when a pension crystallises.

Ignore the fancy name, a crystallised pension is just one where you’ve started to take the money you’ve been saving for retirement. Normally this happens once you’ve reached the minimum retirement age of 55 (57 from 2028). 

We’ll explain more about crystallised pension rules here. 

What types of pension can be crystallised?

There are two main types of pension, defined contribution and defined benefit.

Defined benefit pensions give you a guaranteed income based on your salary and length of time in a job. This kind of pension doesn’t offer the type of flexible benefits offered by direct contribution pensions - other than a possible cash lump sum. They become crystallised when the pension holder starts to take an income. 

Defined contribution pensions have a pension pot that’s based on any money paid in and how your investments have performed. Private pensions like SIPPs (self-invested personal pensions) and most workplace pensions will be defined contribution. Crystallising these pensions happens when you take a tax-free lump sum, choose income drawdown, buy an annuity, or a combination of all of these. You can also opt to withdraw all your money in one go.

Remember, the value of your pension can go down as well as up and you could get back less than has been paid in.

What happens when a pension is crystallised?

When you decide to take money from your pension, there will be some tax rules that will apply.

  • Taking a tax-free lump sum: Once you've reached minimum pension age, when you crystallise your pension, you're entitled to take up to 25% of your of the amount you are crystallising, tax free as a lump sum. You don't have to do this but taking that lump sum will crystallise your pension. 
  • Income tax: When you’ve taken your tax-free lump sum, you may have to pay income tax on the remaining 75% of your pension. How much you’ll pay will depend on the total value of your pension payments and any other taxable income you have across the tax year - including the state pension. If all this is more than the personal allowance of £12,570 for the tax year 2024/2025 then you'll have tax to pay.

    Your exact tax benefits will depend on your personal circumstances and are subject to change.

Paying into your pension

Once you start to take any taxable flexible benefits, like income drawdown, from your defined contribution (money purchase) pension, you’ll activate the money purchase annual allowance (MPAA). This restricts the money you can pay into your pension and receive tax relief to £10,000 in each tax year. We explain more about pension tax rules and allowances here

What is income drawdown?

Income drawdown lets you withdraw money from your pension pot when you’ve reached retirement age, while keeping the rest invested. It’s a flexible option that gives you the freedom to manage your own income. With most types of income drawdown there are no limits on how much you can withdraw. You can also choose how you take your money, whether that’s weekly, monthly or in occasional lump sums. 

Using income drawdown can take discipline, as the money in your pension pot has to last through your retirement. Take too much out and you could run out of cash before you die, affecting your living standards. You’ll also have to keep an eye on the performance of investments in your pension as a drop in the value of your pot will affect your payments.

What is an annuity?

This is where you exchange the value of your pension pot for a guaranteed income, often for the rest of your life. The benefit of an annuity is that it gives you a predictable and secure income. You don’t have to use your entire pot to buy an annuity, you can still take your 25% tax-free and buy one with what’s left. 

There are several different types of annuity you can buy with your pension pot, depending on your needs. Some are fixed, so the amount paid out doesn’t increase over the years, but this can mean your spending power is affected by inflation. Others are linked to inflation, so your payments will increase - although these can have lower starting payments. Others will also cover your spouse or run for a fixed time, rather than a lifetime.

Can I withdraw money from a crystallised pension?

You can withdraw money from a crystallised pension if you’ve chosen income drawdown. If you’ve bought an annuity instead, you’ve entered into a contract to provide you with an income and you won’t be able to withdraw money from your pension. The same applies to a defined benefit pension. 

If you're unsure about your options on taking money from any pension pot you've built up, we’d recommend getting impartial financial advice, so you can be sure any choice is right for you.

The government offers a free service from Moneyhelper called Pensionwise, which can give you guidance on your pension options. If you don't have a financial adviser, you can find one at Unbiased - there will be a charge for advice. 

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