Pension Access at 55+: Understanding Your Options
Pension freedom changed everything in 2015. You now have genuine choices about how to access your pension—but with that flexibility comes complexity.
Age change coming: The minimum pension access age rises from 55 to 57 on 6 April 2028. If you're planning to access your pension between those ages, factor this into your timeline.
Your Four Main Options
Once you reach the minimum pension age (currently 55), you can access your defined contribution pension in several ways:
1. Take Your 25% Tax-Free Lump Sum
You can take up to 25% of your pension completely tax-free. This can be:
- All at once as a single lump sum
- In chunks over time (each withdrawal is 25% tax-free, 75% taxable)
Many people take this to pay off mortgages, fund home improvements, or simply have accessible cash.
2. Drawdown (Flexible Access)
Keep your pension invested and withdraw what you need, when you need it. You control:
- How much you withdraw each year
- When you withdraw it
- How the remaining pot is invested
This gives maximum flexibility but requires you to manage investment risk and withdrawal rates.
3. Buy an Annuity
Exchange your pension pot for a guaranteed income for life. Once you buy, you can't change your mind—but you'll never run out of money.
Annuity rates fluctuate with interest rates and have improved significantly since 2022.
4. Take It All as Cash (UFPLS)
Withdraw your entire pension as cash. 25% is tax-free; the rest is taxed as income. Generally not advisable for large pots—you could face a massive tax bill.
The 25% Tax-Free Lump Sum
This is often called the Pension Commencement Lump Sum (PCLS). Key points:
- Up to 25% of your pension value (or £268,275 if lower—the Lump Sum Allowance)
- Completely tax-free regardless of your other income
- You don't have to take it all at once
- Taking any taxable income triggers the Money Purchase Annual Allowance (see below)
Drawdown: The Most Popular Choice
Flexi-access drawdown has become the default for most people with decent pension pots. Here's how it works:
- Your pension stays invested in your chosen funds
- You take income as needed (monthly, annually, ad-hoc)
- Withdrawals above your 25% allowance are taxed as income
- Your remaining pot continues to grow (or shrink) with markets
The Sustainable Withdrawal Rate
A common rule of thumb is the "4% rule"—withdraw 4% of your initial pot annually, adjusted for inflation. This historically gives about 30 years of income without running out.
But this isn't guaranteed. Markets can underperform, you might live longer than 30 years, and UK-specific factors (inflation, sequence risk) matter.
The Tax Implications
Everything above your 25% tax-free allowance is taxed as income. This stacks on top of any other income you have:
- State Pension: Already uses most of your £12,570 personal allowance
- Employment income: If you're still working, your pension withdrawals are taxed at your marginal rate
- Other pensions: All pension income aggregates for tax purposes
Strategic withdrawal timing can save significant tax. Taking more in low-income years (between finishing work and starting State Pension) is a common strategy.
The Money Purchase Annual Allowance (MPAA)
Once you take any taxable income from your pension (not just the 25% lump sum), your annual allowance for future pension contributions drops from £60,000 to just £10,000.
This matters if you're:
- Still working and contributing to a pension
- Planning to return to work later
- Getting employer contributions
Taking tax-free cash only? If you just take your 25% tax-free and don't touch the rest, you don't trigger the MPAA. You keep your full £60,000 annual allowance.
Annuity Considerations
Annuities fell out of favour after pension freedom, but they're worth considering again:
- Guaranteed income: No market risk, no running out
- Higher rates: Annuity rates have roughly doubled since 2021
- Health conditions: Enhanced annuities pay more if you have health issues
- Inflation protection: Available but expensive—typically halves your starting income
A hybrid approach—some annuity for guaranteed base income, some drawdown for flexibility—can work well.
Sequencing With Other Income
The order you draw from different sources matters enormously:
- State Pension: Can't control when it starts (well, you can defer, but most don't)
- Workplace pension: Often start drawing when you stop working
- ISAs: Tax-free, so valuable to preserve or use to top up without pushing into higher tax bands
- Personal pension/SIPP: Most flexibility in timing
How Talk Through Wealth Helps
Model different drawdown strategies and see how they play out:
- Compare drawdown vs annuity vs hybrid approaches
- Optimise withdrawal sequencing across pension, ISA, and State Pension
- See sustainable withdrawal rates for your specific situation
- Model the tax impact of different withdrawal strategies
- Stress-test against poor market returns and longer-than-expected life
Model Your Pension Access Strategy
Join the waitlist to see how different approaches affect your retirement income.
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