Different options for withdrawing your pension
There are a lot of different ways to access your pension, and they all have different pros and cons. Only you can decide what is right for your personal circumstances. You should consider taking financial advice before making this decision.
For informative purposes only, we have provided a simple explanation of the most common options. Please see below, and let our team know if you have any questions at all.
This document is not a comprehensive guide to the different options and is not intended to give an all-encompassing picture of your options. There may be consequences or implications of these options that we do not mention below.
Option 1: Do nothing
It’s not a problem at all if you start the withdrawal process and then decide to do nothing! Your pension will stay exactly where it is.
Option 2: Transfer your pot to another pension provider
From any age, you always have the option to transfer out to another pension provider. If you let the other provider know you’d like to transfer, most of the time they’ll get in contact with us directly to request this.
Option 3: Take your full pot
You are able to withdraw your full pension savings as a cash lump sum.
In technical pension terms, this is called:
Taking an Uncrystallised Funds Pension Lump Sum of the full amount in the pension pot (full UFPLS)
Tax:
There could be tax implications depending on the size of the pension pot
Usually, you’ll get the first 25% as a tax-free lump sum
You'll pay tax at your marginal rate on the remaining 75%, as it will count towards your annual income
It could move you into a higher income tax bracket
Emergency tax may be deducted from your payment, but you should be able to claim this back from HMRC
Annual Allowance:
This option will trigger the Money Purchase Annual Allowance (MPAA)
This means that the total amount you can pay into any pension pot each tax year will be reduced from £60k to £10k from the point you withdraw
You will not trigger the MPAA if your pot is worth £10k or less and you let us know you'd like to withdraw under the 'small pot' rules
Option 4: Take smaller lump sum payments
With this option, you can withdraw smaller amounts as cash lump sums as and when you wish, leaving the rest of your money invested.
As the remainder of your pension pot is left invested, there's a chance it could continue to grow - however, there is also a risk that it could go down in value. If you choose this option, you may wish to spread your withdrawals over different tax years to minimise the tax you pay.
In technical pension terms, this is:
Taking smaller Uncrystallised Funds Pension Lump Sums (partial UFPLS).
Tax:
Usually, you’ll get the first 25% tax-free
You'll pay tax at your marginal rate on the remaining 75% of the amount you withdraw, as it will count towards your annual income
Annual Allowance:
Taking the first of these lump sums will trigger the Money Purchase Annual Allowance (MPAA)
This means that the total amount you can pay into any pension pot each tax year will be reduced from £60k to £10k from the point you withdraw
Option 5: Take your tax-free lump sum and the rest gradually
You can usually take up to 25% of your pension pot as tax-free cash. This will crystallise the remainder of your pot, which you can leave invested and withdraw from as a regular income, or withdraw occasional lump sums as and when you like.
Your pension pot remains invested and has the chance to grow, but it could go down in value too. If you withdraw too much or your funds don’t perform as well as you’d expected, you could run out of money to fund your retirement.
In technical pension terms, this is:
Taking your 25% tax-free lump sum (i.e. Pension Commencement Lump Sum, or PCLS for short)
You move the rest of your pension into drawdown, leaving it invested but taking your money as and when you need through Flexi-Access Drawdown (FAD)
Tax:
Following the withdrawal of your 25% tax-free lump sum, all future withdrawals will be subject to income tax at your marginal rate
Annual Allowance:
Taking the initial 25% tax-free lump sum won’t trigger the Money Purchase Annual Allowance (MPAA), but this will be triggered as soon as you take any more of your pension through Flexi-Access Drawdown
This means that after you take the first drawdown amount, the total amount you can pay into any pension pot each tax year will be reduced from £60k to £10k from the point you withdraw
Option 6: Buying an Annuity
Typically, the 25% tax-free lump sum is withdrawn first, and then an annuity is bought with the remainder. An annuity provides a guaranteed regular income which will pay out either for a fixed time or until you die.
An annuity will provide you with a guaranteed amount of pension, either for a number of years or until your death. Generally speaking, annuity rates depend on interest rates, life expectancy and the type of pension benefits you are buying (e.g. an increasing or level pension and whether any guarantees or dependants’ benefits are included).
If you are in poor health or have a lifestyle that could adversely affect your life expectancy (e.g. heavy smoker), then you may get an enhanced annuity rate.
Although Penfold does not offer annuities directly, you can withdraw your 25% tax-free and we'll transfer the remainder to the annuity provider of your choosing
In technical pension terms, this is:
Taking your 25% tax-free lump sum
Buying an annuity with the remaining 75%
Tax:
You won’t be taxed on the initial 25% tax-free lump sum
All income payments from an annuity will be subject to income tax
Annual Allowance:
Income received via an annuity does not trigger the Money Purchase Annual Allowance (MPAA), unless you buy an investment-linked or flexible annuity where your income could go down
Option 7: Individual combination to meet your needs
You can choose to do a combination of the following methods of accessing your pension pot to meet your individual requirements and circumstances.
Taking your 25% tax-free lump sum
Taking Uncrystallised Funds Pension Lump Sums (partial UFPLS)
Draw a pension income directly from your Penfold Pension (often called drawdown)
Buying an Annuity
Please let us know if you would like to do that rather than one of the common options outlined above.