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’s important to speak to a financial adviser before deciding what’s 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 isn’t often beneficial. You should get financial advice before 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 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 still in employment, 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.

Whatever you take out from your pension savings will become part of your estate (the money and property you leave behind) after you die. Whoever you leave it to may have to pay inheritance tax.


Defined contribution schemes

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

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.

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 taxed as income.

Points to consider

  • Taking lump sums now will mean less retirement income later on.
  • 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. It is important to take financial advice. A lump sum could 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 when 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.

Points to consider

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

Annuity

  • An annuity is a financial product that gives you an income for life in exchange for your savings.
  • You can also choose to provide an income for someone else if you feel it is likely you will die before them.
  • At the time you use your savings to buy an annuity, you can take up to 25% of your pension savings as a tax-free, cash lump sum. The full amount of any income you get from the annuity will be taxed.
  • If you have or have had cancer, you are likely to qualify for an impaired-life annuity. This pays out a higher income than you would normally get from an 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 people with certain health conditions who may not be expected to live as long. An enhanced annuity is less specific to your individual situation.
  • Before April 2015, most people saving for a pension had to buy an annuity. New pension freedoms mean there are now several other options.

Points to consider

  • The annuity rate you are offered will depend on your gender, where you live, whether you smoke and your health in general.
  • 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. For this reason, it’s important to get financial advice if you’ve had a cancer diagnosis.

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 family 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.

When considering your options, it is very important to speak to a financial adviser.

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

Alison


Defined benefit schemes

If you have a defined benefit scheme, you can access your pension when you retire. This is usually at age 65 unless you have ill health (see above). You will get a lump sum and a regular income for the rest of your life.

Defined benefit schemes are 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 small amount of pension savings

You may be able to take all of 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 with accessing your pension. Before making any decisions, you should check what 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, so make sure you take financial advice. 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 paid by the government.