When you take money from your pension, you’ll need to decide how to do it in a way that works for you. These are the main withdrawal options you can choose from:
1. Small pot lump sum
If your pension is worth £10,000 or less, you may be able to take the whole amount as cash. Usually, 25% will be tax-free, and the rest will be taxed as income. This can be a simple way to close smaller pensions, but it reduces your overall retirement savings.
2. Uncrystallised Funds Pension Lump Sum (UFPLS)
Take lump sums directly from your pension pot whenever you need them. Each payment is usually 25% tax-free, and the rest is taxed as income. Your remaining money stays invested until you take it out.
3. Flexi-access drawdown
Move your pension into a drawdown account and take income whenever you like, while keeping the rest invested. You can usually take up to 25% tax-free at the start, with further withdrawals taxed as income. This offers flexibility but means your pot is still subject to fund performance and changes in value.
4. Annuity
Use some or all of your pension pot to buy an income for life (or for a set period). Your income is guaranteed and won’t run out, but once you’ve bought an annuity, you can’t usually change your mind. This option is not available in the Penny Pension Scheme.
Open market option
You don’t have to take these options with your current pension provider and transfer your policy to them. You can shop around with other providers for potentially better rates, lower fees, or different investment choices. MoneyHelper has a useful tool to compare various providers and products.
What’s the difference? 🤷♂️
The main differences are how flexible each option is, whether your money stays invested, and whether your income is guaranteed. The right choice depends on how much certainty you want and how you plan to use your pension. Getting help to pick the right option and when to withdraw funds will help maximise the full potential of your pension to support you when retired.
Benefits of understanding your options:
Helps you match your withdrawals to your lifestyle and plans
Avoids missing out on better rates or terms elsewhere
Reduces the risk of running out of money too soon
Get free, impartial guidance first 🤝
Before making any decision, you should always book a free Pension Wise appointment from MoneyHelper. They’ll explain each option in detail and help you understand the pros and cons. ✅
Book online at moneyhelper.org.uk/pensionwise or call them on 0800 138 3944. 📞
Important note: Penny doesn’t offer advice and can’t recommend which option is best for you.