Private pensions and your options at retirement

If you have a private pension you will have several options to choose from when you reach retirement. This includes drawdown, buying an annuity or withdrawing a single lump sum.


Whether you have built up money in a private pension through work or through your own personal savings, you will have a few choices to make when you get to retirement age. The two main questions you need to ask yourself are: do I need a tax-free lump sum and how should I use my pension to fund my retirement?

Unfortunately these questions do not have easy answers, yet they can have far-reaching consequences for you and your family.

On this page we have included a brief description of the options you might have available at retirement. In reality you might not have all of these options available to you with your current pension provider, but you should be able to move your money to a new provider if you want to increase the choices you have available.

Minimum age

Currently, the lowest age at which someone can withdraw money from a pension is 55 (unless they are in serious ill-health). Your pension provider might set a different age such as 60 or 65 and they normally call this your “normal retirement age” or “selected retirement age”. If you want to take money from your pension before your normal retirement age it is important to make sure your provider will not penalise you for doing so.

Tax-free lump sum

Normally you can withdraw up to 25% of the value of your pension as tax-free lump sum. The more money you withdraw as a lump sum means there will be less available to provide a retirement income. Some people might be able to take more than 25% of their pension value tax-free but this is quite rare. Also, someone who is subject to the Lifetime Allowance rules might be able to withdraw less than 25% as a tax-free lump sum. If you think you might be subject to a non-standard tax-free lump sum (either more or less than 25% of your pension value) it is important to seek advice before you make any changes to your pension policy.


Once you have decided how much tax-free lump sum to withdraw (if any) you must decide what to do with the remaining value of your pension. Historically the most popular choice was to use this money to buy an annuity, although this has become less popular in recent years. Buying an annuity is considered the safest way of taking your retirement benefits because you know exactly what you will get for the rest of your life.

Buying an annuity means you transfer the remaining value of your pension (after any tax-free lump sum) to an annuity provider, which is normally a large insurance company. This means you will no longer be exposed to the ups and downs of investment returns (instead the annuity provider takes the investment risk for you).

In exchange for this lump sum, the annuity provider will pay you a regular income for the rest of your life. You can choose if you want to receive the same amount each time (a level annuity) or if you want your income to increase in line with the cost of living (an index-linked annuity). If you choose an index-linked annuity you will receive a lower starting income compared with a level annuity.

When you consider buying an annuity you must decide what you want to happen when you pass away. If no-one depends on you financially you might apply for a single life annuity. This means the regular income will stop when you eventually pass away. Alternatively you can apply for a joint life annuity, where your spouse or civil partner will continue receiving some (or all) of your regular income after you have passed away. If you choose a joint life annuity you will receive a lower starting income compared with a single life annuity.

If you are in poor health or if you or a smoker you might be able to get a higher income from an annuity provider. Some providers offer enhanced or impaired life annuities, which pay out more than a standard annuity.

The income you can get from an annuity depends entirely on the rate offered by the annuity provider and the amount of money you have available to buy the annuity. Annuity rates are strongly linked to interest rates, which are near all-time lows. However the Bank of England has signalled its intention to start raising interest rates, which could lead to rising annuity rates.

It is important to note that buying an annuity is the last decision you will need to make with your pension. This is because you can’t switch or transfer your annuity once you have purchased it. Unfortunately this means you can’t move your annuity to a new provider if annuity rates increase, so you have to be absolutely certain that you are happy with the rate you are offered before you commit to buying.

Similarly, the amount you can get from one annuity provider could vary significantly to the next annuity provider. It is always best to shop around to ensure you are getting value for money.


Drawdown has become more popular in recent years, primarily due to the changes made to pension legislation in April 2015. With drawdown the remaining value of your pension (after any tax-free lump sum) remains invested. Then if you want to take money out of your pension (either as a one-off lump sum or as a regular income) you do this by selling some of your investments. This means you are still exposed to the ups and downs of investment returns, unlike an annuity.

Using drawdown is considered one of the riskiest ways of taking your retirement benefits because the value of your fund can go up and down and you could get back less than you invested.

You can increase or decrease the amount you withdraw from your drawdown pension as often as you want to. At either end of the extremes you can choose not to take any withdrawals at all (for example, you might do this if you earn enough from other sources to cover your retirement outgoings) or you can withdraw the remaining value of your pension as a lump sum (however, if you do this, you could pay a significant amount of non-reclaimable income tax and you will leave nothing behind to cover your future outgoings).

When you consider using drawdown you must decide who you want to benefit from any remaining pension value when you pass away. This could be your spouse, your children or even a friend. If you pass away before your 75th birthday they should inherit the value of the pension free of tax, but if you pass away after this they might pay tax (depending on their own tax circumstances).

Other options

There are other, less common, ways of taking money out of a private pension.

With a third-way product you can benefit from some features of an annuity and some features of drawdown. For example, you might be able to partake in investment returns to a limited extent so your income will rise if investment returns rise and fall if investment returns fall. The features of these types of policy vary enormously from provider to provider and some will be far higher risk than others.

With an Uncrystallised Fund Pension Lump Sum (UFPLS) you tell your pension provider that you want to withdraw the full value of your pension as a lump sum. Some of this might be tax-free but the remainder will be potentially taxable, so you could end up paying a lot of non-reclaimable income tax.




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