Flexible access to your pension savings

The ability to take money when you need it is known as flexible access. There are two flexible access options available – Flexi-access Drawdown and Partial Pension Encashment. The main difference between the two options is how and when tax-free cash is taken.

The two options for flexible access

Partial pension encashment

With this option, 25% of however much you take will be tax-free, but the rest is taxable. The Money Purchase Annual Allowance (MPAA) will apply, which impacts how much you can pay into your pensions in the future. We explain more about this below.

The first time you access your pension flexibly, your pension provider may use an emergency tax code. This could mean that you pay more or less tax than expected. To make sure you pay the right amount of tax, you need to contact HM Revenue & Customs (HMRC). Tax treatment depends on your individual circumstances. Your circumstances and tax rules may change in the future.

Graph shows how with PPE you can spend your tax-free lump sum allowance across the withdrawals you make.

The above graph shows how with PPE you can spread your tax-free lump sum allowance across the withdrawals you make.

Flexi-access drawdown

With this option, you can normally take up to 25% of the value of your pension upfront as a tax-free lump sum and keep the rest invested in a drawdown plan.

You can take money from your drawdown plan whenever it suits you. Any money you take from your drawdown plan will count as income for tax purposes. The MPAA only starts to apply once you start to take money from your drawdown plan.

Graph shows how with flexi-access drawdown your tax-free lump sum can be taken at the outset with any future withdrawals being taxable.

The above graph shows how with flexi-access drawdown your tax-free lump sum can be taken at the outset with any future withdrawals being taxable.

Things you need to know about taking your pension flexibly

Benefits

  • Your pension stays invested so has the potential to grow, however investments can go down in value as well as up.
  • Gives you flexibility over what to do with your retirement savings - taking what you need, when you need it.
  • You can take this option, but still decide to buy a guaranteed income for life (annuity) later if you feel that’s right for you.
  • You can continue to pay into your pension. Depending on how you access your savings, MPAA may apply.

Limitations

Unlike an annuity, any payments you take will come directly from your pension plan. You should continue to review the value of your investment regularly and make changes if necessary. Once you take a partial pension encashment or start taking income from a drawdown plan, a restriction on how much you can pay in will apply.

  • Neither flexible access option pays you a guaranteed income for life.
  • You could run out of money if you take too much out or if your pension investments perform badly.
  • For partial pension encashment, there may be a minimum amount you can withdraw each time. There may also be a limit on the number of withdrawals you can make each year.
  • Your current pension may not be set up to allow flexible access. So you may need to move to another type of plan.

If you die before you reach age 75, what’s left will normally be paid tax-free to your beneficiaries. They can then choose to take it as an annuity, a lump sum or through beneficiary’s drawdown.

If you die after you reach age 75 your beneficiaries have the same options but these will be subject to tax.

The Annual Allowance is the total that can normally be paid into any pensions you have, each tax year, before you have to pay a tax charge. The Annual Allowance for the 2022/23 tax year is £40,000.

Once you access your pension flexibly, (apart from solely taking tax-free cash), a lower allowance called the Money Purchase Annual Allowance (MPAA) will apply. The MPAA for the 2022/23 tax year is £4,000. This limit does not apply to any benefits you build up in "defined benefit" (often called "final salary") pensions. This may change in the future.

For flexi-access drawdown, the MPAA applies when you first take money from your drawdown plan.

For partial pension encashment it applies the first time you take money out.

Most people ‘shop around’ for car and home insurance. But many people don't know that you can do the same when comparing flexible access products. Shopping around could help you get more for your money.

In some cases you might need to move your pension to a different provider to get what you’re looking for. But comparing flexible access products yourself can be difficult. Visit the government backed MoneyHelper website to find out more.

Choosing how to take your money is a big decision. Pension Wise from MoneyHelper is a free and impartial service that helps you understand your options for using your pension. It’s a government organisation that offers clear guidance online or over the phone. To find out more or book an appointment visit moneyhelper.org.uk/pensionwise or call 0800 138 3944.

If you’re unsure or need more help to make sure you know which option is right for you, we recommend that you speak to your financial adviser. If you don’t have one, you can visit unbiased.co.uk to find one. Advisers will normally charge for their advice.

Ready to take your money?

If you’re happy that you’ve considered all your options and understand what’s best for you, you’re ready to take the next steps towards your retirement.

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Have a closer look at your options

Take a guaranteed income for life (annuity)

Use your money to provide a regular guaranteed income for life.

Annuity

Take it all in cash

You can take all of your pension savings as cash.

Take it in cash

Leave it for now

You don't need to do anything yet, you can leave your money invested and make a decision when you're ready to retire.

Leave it for now

You don't have to use just one option. You can combine these options in many different ways to meet your needs. Have a look at our table (PDF, 50KB) to help you compare the options.

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