In April 2015, the government introduced major changes to pensions, granting you more flexibility with regards to taking money from your pension pot. Your right to take advantage of these changes depends on a range of factors, including your age and the type of pension scheme you have invested in.

Your options as a defined contribution pension scheme member

If you have reached the normal minimum pension age to access your pension pot (currently 55, or earlier if you are in ill health) and are a member of a defined contribution pension scheme (a scheme in which you have built up a fund with which to buy an income in retirement), you will now have five main options when it comes to taking your pension. You can choose to:
 

1. Leave your pension pot as it is

You can leave the money in your pension pot, enabling it to continue to grow tax-free. This option will potentially provide you with more income when you eventually decide to use your pension pot.
 

2. Use your pension pot to buy a secure income, known as an annuity

You can use the money in your pension pot to purchase an annuity, an insurance policy that provides you with a guaranteed income either for a fixed number of years or for the rest of your life. 
 

3. Use your pension pot to buy a flexible income, known as a drawdown

If you want to take your pension benefits without buying an annuity, you can buy a flexible income, known as a drawdown. There are two main types of drawdown: flexible access drawdown and uncrystallised funds pension lump sum drawdown. If you take a flexible access drawdown, you must take 25% of your pension pot as a tax-free cash lump sum and then invest the remainder to give yourself a regular, taxable income in your retirement. If you take a uncrystallised funds pension lump sum drawdown, you will be free to take small, lump sums of cash out of your pension pot whenever you want to, until your money runs out. One-quarter of each amount you take out of your pension pot is tax-free and the rest is taxable.
 

4. Take some, or all, of your pension pot as a cash lump sum

If you wish to take your pension as a cash lump sum, you will generally be allowed to take up to 25% of your pension pot as a tax-free amount. The rest will be subject to tax at the highest rate of tax you pay in a tax year, known as the marginal rate.
 

5. Take advantage of a combination of these options

You can mix your options, either when you start taking your pension or later on in your retirement. For example, you can take some cash from your pension pot and then purchase an annuity later.
 

Your options as a defined benefit pension scheme member

If you have reached the normal minimum pension age to access your pension pot and are a member of a defined benefit pension scheme (a scheme in which you have built up a fund that will enable you to receive a secure monthly income, based on your employment history, in your retirement) you may be eligible to take advantage of the aforementioned pension freedoms. However, you may need to transfer the money in your pension pot to another scheme before you are able to do so.
 

Your options as a defined benefit pension scheme pensioner

If you are already receiving an income from a defined benefit pension, you will be able to cash in your annuity from April 2016. This means that you will be free to either take the money as a lump sum or place it into a drawdown so that you can take as much or as little from your pension pot as and when you desire.

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