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  • Pensions
  • Savings
  • Investments

Your Pension Options

What is a pension pot?

‘Pension pot’ refers to a type of pension you build up with pension contributions you make and/or your employer makes. You will have one if you have a ‘defined contribution’ pension which includes workplace, personal and stakeholder pension schemes.

Under the new flexible rules you can mix and match any of the options below, using different parts of one pension pot or using separate or combined pots.

Follow the links to read the full details on each option, including the benefits, potential risks and tax implications. Not all pension schemes and providers will offer every option – even if yours does, be sure to shop around.

Leave your pension pot untouched

You may be able to delay taking your pension until a later date. Your pot then continues to grow tax-free, potentially providing more income once you access it. For an overview of the potential benefits and things to look out for if considering delaying, read this free guide: Delaying taking your pension pot

Use your pot to buy a guaranteed income for life – an annuity

You can choose to take up to a quarter (25%) of your pot as a one-off tax-free lump sum then convert the rest into a taxable income for life called an annuity. There are different lifetime annuity options and features to choose from that affect how much income you would get. You can also choose to provide an income for life for a dependent or other beneficiary after you die.

Use your pot to provide a flexible retirement income – flexi-access drawdown

If you have enough secure income in retirement you may choose to leave your pension pot invested and take a flexible income or lump sums from it when you need them. With this option you take up to 25% (a quarter) of your pension pot or of the amount you allocate for drawdown as a tax-free lump sum, then re-invest the rest into funds designed to provide you with a regular taxable income. You set the income you want, though this may be adjusted periodically depending on the performance of your investments.

Your pension pot has the opportunity to grow but there is also a risk that your investments may fall in value. If you rely on this to provide you with an income, you may have to reduce the amount you take if your pot falls in value or risk your money running out if you live for longer than you plan for.

The same goes for any other savings or investments you have. You can take a flexible income from these but you need to monitor how much you take to make sure they last. If you need your savings and investments to last longer than you planned for or they don’t earn as much income or interest as you expected, you may have to reduce the amount of income or risk running out of money.

Take small cash sums from your pot

You can use your existing pension pot to take cash as and when you need it and leave the rest untouched where it can continue to grow tax-free. For each cash withdrawal the first 25% (quarter) is tax-free and the rest counts as taxable income. There may be charges each time you make a cash withdrawal and/or limits on how many withdrawals you can make each year.

With this option your pension pot isn’t re-invested into new funds specifically chosen to pay you a regular income and it won’t provide for a dependent after you die. There are also more tax implications to consider than with the previous two options.

Take your whole pot as cash

Cashing in your pension pot will not give you a secure retirement income.

You could close your pension pot and take the whole amount as cash in one go if you wish. The first 25% (quarter) will be tax-free and the rest will be taxed at your highest tax rate – by adding it to the rest of your income.

There are many risks associated with cashing in your whole pot. For example, it’s highly likely that you’ll be landed with a large tax bill, it won’t pay you or any dependent a regular income and, without very careful planning, you could run out of money and have nothing to live on in retirement. Be sure to get financial advice before cashing in your whole pot.

You don’t have to choose one option when deciding how to access your pension – you can mix and match as you like, and take cash and income at different times to suit your needs. You can also keep saving into a pension if you wish, and get tax relief up to age 75.

Which option or combination is right for you will depend on:

  • When you stop or reduce your work
  • Your income objectives and attitude to risk
  • Your age and health
  • The size of your pension pot and other savings
  • Any pension or other savings your spouse or partner has, if relevant
  • Whether you have financial dependents
  • Whether your circumstances are likely to change in the future

How long will my retirement be?

  • Most people underestimate how long they’re likely to live. A 65 year old man now has a 50% chance of living to 87 and a 65 year old woman a 50% chance of living to 90 (Source: ONS 2014). If you’ve only planned for 20 years in retirement and you live longer than this, you could find yourself struggling financially later in life.
  • As most of us don’t know how long we’re going to live it’s hard to know how long our money needs to last. You don’t want to use up your money too quickly and risk not having enough later on. On the other hand, you don’t want to have to live more frugally than you need to.
  • You also need to consider how inflation can affect how much money you’ll need to live on and how long your savings will last.


Prices tend to rise over time so if you want to maintain your standard of living you need your retirement income to keep pace with inflation.

The State Pension increases by at least the rate of inflation each year and if you receive a retirement income from a past employer this often rises by the rate of inflation or a set amount each year.

If you rely on savings and investments to boost your income, you’ll probably need to increase the amount you take from these over the years if you want your income to go as far as it used to.

If you take more income than your savings and investments earn each year, you will gradually eat into your capital. The longer this goes on, the fewer savings you will have and the greater the risk of these running out.

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