Accessing your pension

There are different ways of accessing your pension. This depends on the type of pension you have and your illness.

If you have or have had cancer, you may be able to retire early and claim your pension. Your pension scheme will have rules about this. If you have a life expectancy of less than 12 months, you may be able to get your pension as a one-off lump sum.

If you have a defined contribution scheme pension, you can access your pension in different ways after the age of 55. You can choose to have one lump sum, several smaller lump sums, or a regular income. It is important to speak to a financial adviser before deciding what is best for you.

If you have a defined benefit scheme, you can access your pension when you retire. This is usually at the age of 65. You will get a lump sum and a regular income for the rest of your life. You may be able to transfer to a defined contribution scheme, but this is not often beneficial. You should get financial advice if you’re thinking about transferring.

Ill-health retirement

If you have or have had cancer, you may be able to retire and claim your pension early because of ill health. Your illness usually has to be permanent and stopping you from working, but it may depend on the rules of your pension scheme.

If you qualify for ill-health early retirement, your pension scheme will tell you what your options are.

Life expectancy of less than 12 months

If you have a life expectancy of less than 12 months, you may be able to retire because of serious ill health. You will usually get the whole of your pension as a one-off lump sum.

  • If you are under 75, the whole sum will usually be tax-free. In this case, a registered medical professional must give evidence to the scheme administrator that your life expectancy is less than a year.
  • If you are 75 or older, 25% of the lump sum will be tax-free and the rest taxed as income.
  • If you die while employed, your pension scheme may pay out a lump sum called death-in-service. The amount is often a multiple of your salary at the date of death. You should speak to a financial adviser to make sure you take the best option for you and for people who are financially dependent on you.
  • Any money you take from your pension, but do not spend or give away before you die, will become part of your estate. Your estate is the money and property you leave behind. We have more information about passing on your pension benefits.


Defined contribution schemes

A defined contribution scheme is a type of pension where you (and often your employer) pay money into a fund. The fund is invested and hopefully grows over time.

If you have a defined contribution scheme, you can choose to access your pension in a variety of ways after the age of 55.

It’s important to get financial advice before deciding how to access your pension.

Lump sums

You can choose to take all your pension savings in one go. You will get 25% of your savings tax-free and you will pay tax on the rest as income.

Or you can choose to take out some of your savings as smaller lump sums. While you have enough money, you can do this as many times as you like. For each lump sum, 25% is tax‑free and the rest is taxed as income.

Things to think about

  • Taking lump sums now means you will have less retirement income later.
  • If you have other income, taking a large lump sum from your pension may push you into a higher income tax band. For example, you may have other income from investments, renting out a property or a part-time job. A lump sum could also affect any means-tested benefits you are getting.

Adjustable income

You can choose to invest your pension savings in a fund that will provide you with a regular income. You can also take lump sums from the fund whenever you like. This option is called adjustable income or flexi-access drawdown.

When you move your savings into an adjustable income fund, you can take up to 25% of your pension savings as a tax-free cash lump sum. Any lump sums or income you take after that will be taxed.

Things to think about

  • If you have a workplace pension scheme, it may not offer an adjustable income option. You may be able to transfer it into a personal pension and then choose this option.
  • Visit Pension Wise for information on how to find the best adjustable income product.
  • Adjustable income is not guaranteed, as you may run out of money. This can happen if you take out too much of your pension savings, your investments perform badly, or you live longer than expected.

Annuity

An annuity is a regular, guaranteed income you get for the rest of your life. You buy it in exchange for some or all your pension savings. You can also choose to provide an income for someone else. For example, if you think you will die before them.

If you have or have had cancer, you are likely to qualify for an impaired-life annuity. This pays out more than a normal annuity. If you don’t qualify for an impaired-life annuity, you may qualify for an enhanced annuity. This pays more to people with particular lifestyles or health conditions who may not live as long.

When you buy the annuity, you can also take up to 25% of your pension savings as a tax-free, cash lump sum.

You will pay income tax on money you get from the annuity.

Things to think about

  • The annuity rate you are offered will depend on where you live, whether you smoke and your general health.
  • Unlike adjustable income, there is no risk of running out of money. The income is guaranteed for the rest of your life. However, annuity rates can offer quite poor value in some cases.
  • Your pension scheme may offer you their own annuity policy, but this won’t necessarily be the best option for you. You have the option of buying your annuity elsewhere to get a higher income. This is called the open market option.
  • Visit Pension Wise for information on how to find the best annuity product. The Money Advice Service also has an online tool that can be a good starting point when looking for annuities. But remember that health conditions can affect the rate of an annuity and may mean it pays more.

Which is the best option for you?

The best option for you will depend on:

  • the size of your pension savings
  • whether you want to leave any savings to your family or loved ones
  • how much income you and your loved ones need to live on
  • your attitude to investment risk
  • whether you have any income from other sources
  • your health and how long you expect to live
  • whether you claim any income-related state benefits – these may be affected depending on how you choose to take your pension.

You don’t have to choose just one option. For example, you might use part of your savings to buy an annuity and leave the rest in an adjustable income fund. This could give you a secure income and lets you use the rest of your savings when you need it.

A financial adviser will help you consider your options.

I had a work pension that I have cashed. I now have a lump sum and a monthly payment.

Alison


Defined benefit schemes

A defined benefit scheme is a type of pension arranged by your employer. It means they will give you a pension when you retire. This can also be called a ‘final salary’ or ‘career average’ scheme.

If you have a defined benefit scheme, you can access your pension when you retire. This is usually between the ages of 60 and 65, unless you have ill health. You will get a lump sum and a regular income for the rest of your life.

If you have a small amount of pension savings

You may be able to take all your defined benefit pension as a lump sum if:

  • you are aged at least 55 (or earlier, if you have ill health)
  • the total value of your pension fund or funds is no more than £30,000.

You can take 25% of your pension tax-free. The rest will be taxed as income.

Transferring to a defined contribution scheme

If you have a defined benefit scheme, you may be able to transfer to a defined contribution scheme. This gives you more flexibility when accessing your pension. Before making any decisions, you should check which charges may be taken from your savings and whether you would lose any valuable benefits by transferring.

In general, defined benefit schemes offer good value. Switching to a defined contribution scheme is rarely beneficial, but it may be in some circumstances. Make sure you take financial advice if you are thinking of doing this. If the value of your defined benefit scheme is £30,000 or more, you will have to get financial advice before you can make a transfer.

When you can transfer

Transfers may be allowed if:

  • you have a public sector-funded pension scheme (for example, a Local Government Pension Scheme)
  • you have a private sector pension scheme.

Transfers are not allowed if you have an unfunded public sector pension scheme (for example, the Teachers’ Pension Scheme).

Back to Pensions

Understanding pensions

There are many different pension schemes available, including the State Pension that is paid by the government.