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Pension freedoms explained: what are my choices?

Last updated 27th November 2023

5 min read

The Pension Freedoms legislation was introduced in April 2015. It gives you more flexibility when accessing your pension pot.

Before the Pensions Freedoms act came into effect, people had restricted access to their pension. There's now much more freedom, thanks to the legislation.

To help you understand the different choices available to you, this guide looks at:

  • which pensions are covered under the legislation
  • what your choices are
  • the tax implications

As always, the decisions you make are completely up to you. But we hope this guide gives you confidence when it comes to managing your pension.

Are all pensions covered under the Pension Freedoms act?

No, only defined contribution pensions( opens in a new tab) are covered. These are also known as 'money purchase' pensions.

With this type of scheme, you build your pension savings over time. You then decide how and when you access the money.

Defined benefit pensions aren't covered under the Pension Freedoms legislation( opens in a new tab). These are also known as 'final salary' or 'career average' pensions. They usually pay a secure income for life, based on your salary and length of service with your employer.

Can I transfer to a defined contribution pension?

It's possible to transfer funds from a defined benefit pension into a defined contribution pension. This would let you access the flexibility outlined in the Pension Freedoms legislation.

You must get independent advice before you make this decision. You'll be sacrificing a guaranteed, regular income which increases each year. Of course, the decision is yours to make in light of your circumstances.

Pension freedoms explained

From the age of 55, you'll be able to make a decision on how you receive your pension.

We've listed your six options below when it comes to accessing your pension pot. If you’re unsure about your choices, seek independent financial advice.

1. Leave your pot untouched

It's up to you whether you withdraw funds in your pension pot or not. It's fine to leave your pension untouched until you need it later in life.

2. Guaranteed income or 'annuity'

With guaranteed income, you can use your pension pot to buy an annuity. This means you'll have a guaranteed income for the rest of your life. The type of annuity can differ depending on which company you choose.

When you buy your annuity, many factors are taken into consideration. These include age, lifestyle and the type of insurance you've chosen. This will impact the amount of guaranteed income you receive.

You don’t need to use all your pension to purchase a guaranteed income. If you wish, you can also take out up to 25% of your pension as a tax-free lump sum.

3. Adjustable income or 'drawdown'

With an adjustable income, or flexi-access drawdown, you’re able withdraw a 25% tax-free lump sum. This means you keep the remaining 75% invested to give you a taxable income.

In this instance, you have control over how much you take out and when. The amount available to you will depend on how well your investments perform in the stock market.

Be aware that some providers may charge a fee for choosing and managing investments.

4. Take cash in chunks

This is known as an ‘uncrystallised funds pension lump sum’. You’re able to take cash out of your pension pot in chunks until it runs out. There are usually no limits to how much you can take each time or how many times you withdraw.

Each time you withdraw a cash lump sum, 25% is tax-free and 75% is taxed.

5. Withdraw entire pension pot

If you wish, you can withdraw the entire value of your pension pot in one lump sum.

It will be essential to consider the tax implications of this choice. Any earnings above the personal allowance for the current tax year will be subject to income tax.

Again, 25% of your total pension pot will be tax-free, with the remaining 75% taxable.

6. Mix your options

Throughout life, there are many unexpected surprises. Your priorities are likely to change over time. This is no different after you reach retirement.

The pension choice you make at 55 may not be the best option for you in the future. Fortunately, you’re able to mix your options and change how you receive your pension throughout your retirement.

Say, for example, you chose to take cash out in chunks at the start of your retirement. There is nothing stopping you from changing to an annuity later on to receive a guaranteed income.

If you have more than one pension, you’ll be able to choose different options for each one. This gives you complete flexibility with how you receive your pension.

Tax implications for pension withdrawals

Usually, you can receive up to 25% of your pension pot tax-free. The remaining 75% of your pension is taxable as earnings.

Your personal allowance will remain the same as before retirement. (Find out current tax rates here( opens in a new tab)). This means any income above the current yearly rate will be taxed. If you don't receive earnings above the personal allowance, your pension won't be taxed.

With this in mind, you'll need to consider the tax implications when taking out a cash lump sum. The more you take out, the more likely you are to pay additional tax.

You can read more in detail about tax on pensions in our helpful guide.

Further guidance on pensions

To help people over 50 with their choices when it comes to pensions, the government has set up Pension Wise( opens in a new tab). This is a national service offering free, impartial guidance. Pension Wise can be contacted via telephone or in person, with easily bookable appointments on their website.

Want to do some more reading around pensions and managing your money over 50? We have a number of guides you may find useful:

The thoughts and opinions expressed in the page are those of the authors, intended to be informative, and do not necessarily reflect the official policy or position of SunLife. See our Terms of Use for more info.