What to do with your pension cash

Radical reforms to pensions, effective from April 6, mean you’ll have much greater flexibility and choice when it comes to deciding what to do with your retirement savings.


If you’re aged 55 or over, and have a private pension that you and your employer have made contributions, you can withdraw as much or as little of your pension as you want, when you want.

Find out more about what’s happening in our article here.

And here’s our guide to your new pension options. But first…

DON’T fall victim to pension fraudsters

This is crucial, so it’s worth repeating: Don’t fall victim to pension fraudsters!

Crooks follow the money, so it’s inevitable that they’ve clustered around private pensions, with various scams aimed at those yet to reach retirement age and those granted greater freedoms under the new rules.

They’ll try to tempt you with impossibly generous returns from investment schemes, but the old rule applies: if something looks too good to be true, then it usually is.

You can find out more about how to protect yourself from pension scammers in our article Watch out for these pension scams.

OPTION 1 - Take the whole thing as a lump sum

Now you can withdraw as much of your pension as you want, you might be tempted to take the whole lot out in one go.

But tax on pension withdrawals could make this an expensive mistake.

Only the first 25% you take out of your pension will be tax-free. If you take out more than this, then that amount will be taxed at your usual rate of income tax.

And remember, it will be added to any other income you get in the year, so it could push you into a higher tax bracket, reducing what you actually receive.

If you make a series of withdrawals, the first 25% you take out each time will be tax-free, with the rest charged at your income tax rate.

There’s also a risk you could spend it too quickly, leaving yourself facing the rest of your retirement in financial difficulties.

OPTION 2 - Buy an annuity

The pension reforms were partly designed to stop people being forced into buying an annuity (a product which provides an income for life). But buying one could still be a valid option if you want a secure income.

Although annuity rates are very low at the moment, an annuity does at least guarantee that you won’t outlive your savings.

You might be able to get a better annuity rate if you’ve got a health condition, such as diabetes, or high blood pressure.

Some experts suggest that you might want to use an annuity just to cover your essential outgoings each month and then look at other options for the rest of your pension pot.

Read more about whether an annuity could be right for you in our article 'Does it still make sense to buy an annuity when you retire?'

Only the first 25% you take out of your pension will be tax-free...

OPTION 3 - Keep your pension invested

If you don’t want to take a lump sum out of your pension, you might choose to keep it invested when you retire and take money out of it as and when you need it.

These withdrawals have the catchy name of uncrystallised fund pension lump sums (UFPLS). You’ll be able to take 25% of each withdrawal tax-free, with the rest taxed at whatever rate of tax you pay – called the marginal rate.

There may be charges each time you dip into your pension, so make sure you know what these are.

Alternatively, you can keep your pension invested and use “flexi-access drawdown” to provide you with an income.

With drawdown, you can take the tax-free cash and the remaining funds stay invested until you need an income. Any income taken will then be taxed at your marginal rate.

OPTION 4 – Invest it in buy-to-let property

You might be thinking about using your pension to buy a property to let out, so that you have some income and also the prospect of capital growth.

But there are lots of risks involved. If you do want to buy a property, you’ll need to take a big lump sum out of your pension, especially as you might find it difficult to get a mortgage given your age (brutal but, alas, true – the older you are, the harder you’ll find it to borrow a large amount over a longer period).

This could result in a big tax bill if you take more than 25% of your accumulated fund.

Being a landlord can be expensive too, particularly if there are periods when your property isn’t let out.

There can also be regular maintenance costs to cover so you’ll need to factor these in. too.

OPTION 5 - Leave your pension to loved ones

This might not be something you actually choose to do!

If you die before the age of 75, the new rules mean your pension can be passed on to your beneficiaries without them having to pay tax on it.

If you die after the age of 75, then your loved ones will have to pay tax at their usual rate on any income they take from your pension.

Please note: any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.

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