Published: 17 Mar 2023 Last updated: 05 Apr 2024
What will happen if you take some of your pension money?
From age 55 (57 from 6 April 2028 unless you have a protected pension age) you can start using the money you’ve saved in your pension. One option is to take the money in cash in a way that suits you. There are different ways of doing this, with their own tax implications.
Some older pensions may not give you as much choice over how you take your cash, so it’s sensible to check the terms and conditions of your policy. If it doesn’t offer you the approach you’d like to take, you may want to consider transferring your pension to get greater flexibility. Our Aviva Pension offers flexible options for using your money.
Taking tax-free cash through income drawdown
You can take money from your pension as and when you need to through income drawdown. It allows you to receive the tax-free part of your pension (usually 25% of your total) as either a single lump sum or in instalments, and to take the taxable part at a later date if you wish. This means it can be a flexible approach that you can use to complement your personal, income and tax circumstances.
Every time you take tax-free cash, three times what you take will be moved into what’s called a drawdown account. This is the taxable amount that relates to your tax-free withdrawal. The drawdown account remains in your pension so both pension and drawdown section stay invested in the funds selected. All money within your pension can go down as well as up in value so you should monitor its performance regularly.
You can take money from your drawdown account whenever you want, but any amount you take will be taxed as income.
You can take your tax-free money in a single lump sum
Here’s an example:
100%
£100,000
Your pension holds £100,000
25%
£25,000
You take the tax-free 25% as a single lump sum, so £25,000 is paid to you tax free
75%
£75,000
£75,000 will move into drawdown (a taxable amount, three times your tax-free withdrawal)
You can take your tax-free money in instalments
Here’s an example:
100%
£100,000
Your pension holds £100,000
25%
£25,000
Your tax-free allowance is 25%, so £25,000
10%
£10,000
You only take out £10,000, which is paid to you tax free
30%
£30,000
£30,000 is moved to drawdown (a taxable amount, three times your withdrawal)
60%
£60,000
The remaining £60,000 is left where it is
60% £45,000 / £15,000
£45,000 / £15,000
Out of the remaining £60,000, £15,000 is tax free, and £45,000 is taxable when it's taken
Taking taxable lump sums
There’s another way of taking cash lump sums from your pension savings flexibly. Each time you take out money, 25% will be tax free, and 75% will be taxed as income. This is called an uncrystallised funds pension lump sum (UFPLS). What you don't take stays invested in your pension, which means its value can go down as well as up so you should monitor its performance regularly.
Here’s an example:
10%
£10,000
Your pension starts at £100,000 and you take out £10,000 each time
10% £2,500 / £7,500
£2,500 / £7,500
£2,500 is paid to you tax free, £7,500 is taxable
90%
£90,000
After your first withdrawal, £90,000 is left in your pension
Things to consider before taking money from your pension
- You can carry on taking money from your pension until your funds run out, but you need to make sure that you have enough money left for the rest of your retirement
- By taking a lump sum, you’ll reduce the value of your pension and the retirement income it will be able to provide
- In the examples above, we’ve assumed no investment changes to the value of your pension or drawdown account. However, as it stays invested, it still has the potential to go down or up in value and you may get back less than the amount you invested. A sustained drop in the value of the investment means that you will have less money from which to take an income
- Tax rules and your personal circumstances may change in the future which you should keep in mind when making your pension income decisions now
- While some of your pension remains invested, you will continue to pay annual charges for your fund
- The information on this page is based on our current understanding of tax rules. Tax rules in Scotland and Wales may differ
- Once you have taken any money which is subject to income tax from your pension, your annual allowance for future payments to defined contribution pensions reduces from £60,000 to £10,000. This is known as money purchase annual allowance. You’ll be subject to tax charges if the amount you pay in to any personal pensions exceeds your annual allowance. You should think carefully before you take anything other than the tax-free cash from your pension
- The lump sum allowance is how much you can be paid from all your pensions tax-free during your lifetime and in 2024/2025 it’s £268,275. The lump sum and death benefit allowance is the tax-free limit for payments during your lifetime and on death – it’s currently £1,073,100. UK Income Tax is payable on any benefits taken above these limits
- Any money left in your pension when you die can be passed to your beneficiaries and is not usually subject to inheritance tax
Your next steps
- Work out how much tax you could pay on what you take out of your pension by using our pension withdrawal tax calculator
- Before you decide, contact your pension provider. Different providers may offer different options. If you are thinking about switching to a new provider it's important to bear in mind this is a complex decision and you need to consider the charges, fund range and any valuable benefits that could be lost
Need more help?
While we can give you all the facts about our products and services, we can’t give you personalised financial advice and nothing on our website is a personal recommendation. If you would like more information, please explore our financial advice.
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