Accessing your pension

Under normal circumstances, you can start taking money from your pension from age 55. From 6 April 2028, the Normal Minimum Pension Age will increase to 57. 

If you are planning to take money out of your pension fund, you are entitled to free, impartial guidance from Pension Wise. You can access Pension Wise on the MoneyHelper website or call 0300 330 1003 (from outside the UK +44 20 3733 3495), if you wish to use this service.

Read more about your options for accessing your pension here.

 

Please note: Anyone thinking of withdrawing lump sums from their pension fund should consider the impact this will have on future retirement income.

Your options for taking money out of your pension:

  • Flexi-access drawdown – is a form of income drawdown, where your money remains invested and there is no limit on the amount of income you can take each year. Your pension fund typically pays 25% as a pension commencement lump-sum (PCLS), which is tax-free. It can be paid as a lump-sum or as regular income. The remaining 75% of the fund remains invested in your SIPP and is normally used to pay you regular taxable income, be available to access as taxable lump-sum or left as legacy for your dependents. Please note that the value of your investment can fluctuate up and down and it’s possible that you may get back less than the amount you originally invested. You can use all or some of your invested fund to buy some guaranteed lifetime income (Annuity) but you will lose access and control of the fund used.
  • Capped drawdown – works in a similar way to flexi-access drawdown but it has limits on the amount of income you can take each year from your pension fund. It allows you to vary the amount of taxable income from zero to a maximum amount, determined by reference to tables published by the Government Actuary’s Department (GAD), and they are reviewed regularly. If you request an income amount in excess of the capped drawdown limit, we will automatically convert your SIPP in capped drawdown to flexi-access drawdown. Once your SIPP is in flexi-access drawdown, capped drawdown is no longer available to you.   If you are in capped drawdown with another pension provider and you are looking to consolidate, then you transfer to us, and remain in capped drawdown. 
  • Uncrystallised funds pension lump sums (UFPLS) – is where you can take your pension as a single or series of lump sums, of which 25% will be tax-free and 75% will be taxed as income. This is known as taking Uncrystallised Funds Pension Lump Sums (UFPLS). You can use UFPLS to fully encash your SIPP or to pay you an income, subject to a minimum individual withdrawal level of £1,000. The remainder of the fund can remain invested, so it has potential to continue to grow.
  • Lifetime annuities – are designed to regularly pay out a guaranteed amount of money for the rest of your life. You agree the amount when you buy one. You’ll also decide how often you’ll get it and whether you want it to reflect your lifestyle and health. Once you’ve bought an annuity, you can’t change the amount you get or cancel it. That’s why it’s very important to make sure you choose the right one by shopping around and getting financial advice. The total amount it pays out will depend on how long you live. You might get back more or possibly less than you originally paid for it, if you choose death benefits such as Value Protection, Joint-life or Guaranteed Periods.
  • Fixed term annuities – are designed to pay you a guaranteed income for a set period of time. You can choose a term from between one and 40 years – although five to ten years is typical. The annuity provider invests the money you pay for the annuity. At the end of the term, you’ll usually get a ‘maturity amount’. This lump sum is the money you paid, plus the investment growth – but minus the income you’ve received so far. The amount will depend on how much income you needed over the term, and how much you paid for the annuity at the start. 

Important notes:

  • James Hay does not provide annuities and therefore you will need to shop around for the best product for your needs.
  • You can do a combination of these options i.e. Lifetime annuity and Flexi-access drawdown.

Opportunities

1: Flexible access to your pension funds: You retain control and can easily vary the amount of money you take from your pension fund and when you take it, normally to meet your current and future needs.

2: Extended growth potential: You can leave your pension fund invested until you need it, in order to maximise its growth potential.

3: Tax-planning: You can use your pension fund in a tax efficient way. For example, you may choose to take your tax-free lump sum as income while you are still working and subject to a high-rate tax. You could then take the taxable income when you stop working and may be subject to basic rate income tax.

4: Estate planning: If you die before age 75, the pension funds are normally passed on tax-free to your beneficiaries. Should you die on or after 75, you can also pass your pension on to your beneficiaries, but these funds will be taxed at the beneficiaries’ marginal rate of tax when withdrawn. To let us know whom you would like your pension funds to go to in the event of your death, please complete and submit an Expression of Wish Form. It is important to keep this form updated. From April 2027, the government are proposing changes that most unused pension funds and death benefits will be included within the value of a person’s estate for Inheritance Tax (IHT) purposes. This is different to the current rules where pensions are not normally included within an estate. We are still waiting for HM Revenue & Customs (HMRC) to confirm and clarify how these proposed new rules will work in practice, but we will keep you updated.

Risks

Risk 1: Losing pension guarantees: Some individuals are choosing to transfer their employer’s defined benefit (‘final salary’) pension schemes into personal pensions and SIPPs to take advantage of ‘pension freedoms’ but are losing valuable pension guarantees in the process. because the cost of providing the pro.

Risk 2: Becoming the victim of a scam: Individuals looking to access their pension fund are often being targeted by fraudsters seeking to part them from their money by promising unrealistic returns or promising to help them withdraw their pension.

Risk 3: Running out of income: Withdrawing large lump sums or very high levels of income can deplete the pension fund overtime so there isn’t enough to provide a sustainable income throughout retirement.

Risk 4: Paying too much tax: Whilst 25% of your pension is normally available tax-free any further money you take out, will always be subject to income tax. This may mean if you take out a large amount in a single tax year, you could end up in a higher rate tax bracket and with a large tax bill. For example, by taking your entire pension fund as UFPLS.

Risk 5: Falling fund values: By keeping a pension fund invested in the stock market you can see its value fluctuate, perhaps at a time when you may not have enough time to recover from market falls. If your pension fund is small, you may find it hard to diversify investments sufficiently to spread risk.

Risk 6: Uncertain income levels: Unlike an annuity, flexi-access drawdown offers no guarantees about the level of income you receive or how long it can be paid for.

Please note: Flexibly accessing your pension can limit how much you can pay in to any pension scheme, as you may be subject to the Money Purchase Annual Allowance (MPAA) of £10,000 a year. The MPAA will be triggered when taking taxable income from your pension fund using UFPLS, flexi-access drawdown or a fixed term annuity.

Investment strategy and support

Investment Pathways

If you are looking to withdraw money from your pension without following regulated financial advice, you may not be fully aware of the options available to you, or how your current investments can support your desired level of income.

The Financial Conduct Authority's (FCA) Investment Pathways framework seeks to provide you with general investment strategies that align with how you intend to access your pension over the next five years. To learn more about how Investment Pathways could work for you, you can use the Investment Pathways Comparison Tool hosted by MoneyHelper at www.moneyhelper.org.uk. This guidance aims to make you aware of the drawdown choices you can make, and how your investment decisions can be tailored to fit with your financial goals.

Please note: James Hay does not provide financial advice, and does not offer Investment Pathways at this time; we strongly suggest that you seek advice from a regulated financial adviser. If you do not have one, you can find a list of regulated advisers in your area at www.moneyhelper.org.uk or by calling 0800 011 3797 (from outside the UK +44 20 7932 5780).

Getting advice and guidance

The choices you make for your pension fund can determine the level of income you receive for the rest of your life. For this reason, we strongly encourage you to seek regulated financial advice and guidance to decide the best course of action to take.

James Hay cannot provide financial advice. If you would like to speak to a regulated financial adviser but do not have one, please visit www.moneyhelper.org.uk to find a regulated adviser in your area.

If you are planning to take money out of your pension in the near future, you are also entitled to free, impartial guidance from Pension Wise. You can access Pension Wise on the MoneyHelper website or call 0800 011 3797 (from outside the UK +44 20 7932 5780), if you wish to use this service.