What you can do with your pension pot

When you retire, you need to decide what to do with the money you’ve saved towards your pension – your pension pot. There are lots of options to consider, and it’s important you make the best choice to meet your future needs.  

What is a pension pot?

Your pension pot is the total amount of pension contributions you and/or your employer have made to save for your retirement. Your pot also includes any capital growth earned from the fund’s investments, depending on how your scheme was set up.

Your pension pot doesn’t include your State Pension which is provided by the government.

Your fund should send you a pension statement once a year that tells you how much your pension pot is worth, or there may be an option to check this on their website.

If you’ve made pension contributions into multiple pension pots then you’ll need to contact each fund separately for a statement.

When can I withdraw money from my pension pot?

You must have reached a certain minimum pension age set by your pension fund provider to access your pension pot – usually 55 years.

You may be able to withdraw your pension earlier if you’re retiring because of poor health or disability, but the rules depend on your pension scheme.

Be aware of pension scams as you are nearing pension age. Fraudsters are more likely to approach you with advice about withdrawing and investing your pension. They may attract you by making a false claim that you can access your pension before you’re 55.

How can I use my pension pot?

You have the freedom to choose how you use each of your pension pots, based on what best suits your needs. Each option comes with its own set of rules, fees, benefits, risks and tax issues.

Deciding what to do with your pension pot can be complicated – there are many factors to consider and financial terms to understand. Seek advice from a regulated independent financial adviser before making any decisions and consider all your options carefully.

You don’t have to rush into anything. You don’t want to end up in a situation where you’re unable to use your pension pot money, or the money has run out. Think about your:

• lifestyle
• partner or family
• age
• long-term health and life expectancy
• current and future care needs
• other sources of income.

Not all pension schemes and providers will offer every option. Talk to your pension fund provider to find out what’s available. Your options may include:

• doing nothing – leave your money invested in your pension scheme
• withdrawing some or all of your pension pot as a cash lump sum
• buying an annuity
• investing part or all of your pension onto the stock market (income drawdown)
• a mix of these options, depending on the size of your pension pot.

What do I need to consider with cash withdrawals or lump sums?

You could close your pension pot and take the whole amount as cash in one go if you wish – this is called a lump sum. Or you could treat your pension pot like a bank account and make several withdrawals when you need to.

Some things you should bear in mind before taking out a cash withdrawal or a lump sum:

• Not all pension providers can handle cash withdrawals.
• There may be high fees or charges for each withdrawal.
• There may be high tax charges. Only 25% of each withdrawal (or of your lump sum) is tax-free – the remaining amount is taxable and this may push you into a higher tax bracket.
• There may be a maximum limit on the number of times you can make cash withdrawals.

What do I need to consider with annuities (guaranteed income for life)?

An annuity converts your pot into an annual pension, giving you a guaranteed income for life or a specified period.

Regardless of your pension provider, it’s your legal right to buy your annuity from any provider you wish. It may be worth shopping around and getting personalised quotes from a few providers to make sure you’re getting the best deal.

Some things to bear in mind for annuities:

• Once you’ve purchased an annuity and decided on the income you wish to receive, you can’t change your mind and switch to another plan or provider.
• How flexible is the product? For example, you may not be able to increase your income in future because of the increased cost of living with inflation.
• Some providers require a minimum amount to purchase their annuity.
• Annuity rates can decrease or increase based on the stock market or economy.

Read more about annuities

What do I need to consider with income drawdown schemes?

In a drawdown scheme, you transfer some or all of your pension pot into a scheme, which is then invested on the stock market. You can draw income from your investment and there are no restrictions on the amount you take.

Some things to bear in mind for income drawdown:

• Fees may be expensive.
• Your income isn’t a guaranteed amount.
• Without a maximum limit on how much you can withdraw annually, you could run out of money.
• Your investment can decrease or increase based on the stock market or economy.

Will taking money from my pension pot affect my benefits?

How you use your pension pot can affect benefits you currently receive or your eligibility to claim a benefit in the future. This is because withdrawals or investments may be counted as income or capital, which may affect a ‘means-tested benefit’.

Means-tested benefits include:

• Pension Credit
• Housing Benefit
• Income Support
• Income-based Jobseeker's Allowance
• Income-related Employment and Support Allowance

If you spend or give away money (including tax-free cash) from your pension pot to get or increase benefits, the Department for Work and Pensions or your local council may re-assess your eligibility and treat you as still having that money.

What should I do next?