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 and claim your pension early. Your pension scheme will have rules about this. If you have a life expectancy of less than 12 months, you may be able to take serious ill-health retirement and get your pension as a one-off lump sum.

If you have a defined contribution scheme pension, you can access your pension after the age of 55. You can choose to have one lump sum, several smaller lump sums, or a regular income. Speak to a financial adviser before deciding how to access your pension.

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. You 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. Get financial advice if you are thinking about transferring.

Ill-health early 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. It depends on the rules of your pension scheme.

If you have a defined benefit scheme and claim your pension early due to ill health, it may give you less money. This is because there is less time for the pot of money to grow. Some schemes give you the same money, and others could pay more. This depends on the rules of the scheme.

If you qualify for ill-health early retirement, your pension scheme will tell you what your options are. You should also speak to an independent pensions adviser such as a Macmillan financial guide before you decide.

Life expectancy of less than 12 months

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

Things to think about

  • If you are aged under 75, the whole sum is usually tax-free. In this case, a registered medical professional must give evidence to the scheme administrator that your life expectancy is less than 12 months.
  • If you are aged 75 or over, 25% of the lump sum is tax-free and the rest is taxed as income.
  • Taking a lump sum could affect any means-tested benefits you are getting.
  • If you choose to take serious ill-health retirement, you might use all of the money you have saved. This means there would be no benefits payable to your beneficiaries after you die. This depends on the rules of the scheme.
  • Before choosing to take serious ill-health retirement, check the death benefits payable to your beneficiaries if you were to die before taking your pension. For example, if you die while employed, your pension scheme may pay out a lump sum called death-in-service. You should speak to a financial guide to make sure you choose the best option for you and for people who are financially dependent on you. Call 0808 808 00 00 to speak to a Macmillan financial guide for free.
  • Any money you take from your pension, but do not spend or give away before you die, becomes part of your estate. Your estate is the money, possessions and property you leave behind. We have more information about passing on your pension benefits.

It has been a bit of a financial shock going from being on a reasonable salary to a pension, but at least it’s something, and some people may not even have that option or provision.

Nelson

I tried to put my finances in order by setting things in motion to cash in my teacher’s pension on grounds of serious ill health.

Anne


Defined contribution scheme

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 number of ways. Most schemes let you take money out when you are over the age of 55.

It is important to get financial guidance before deciding how to access your pension.

Lump sums

You can choose to take all your pension savings in one go. You get 25% of your savings tax-free and you pay tax on the rest as income unless you are accessing it due to serious ill health.

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 early means you will have less retirement income later.
  • If you have other income, taking a big 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, or could become entitled to.
  • If you would like to keep saving into the pension, you will have a reduced annual allowance of £4,000. The annual allowance is the amount that can be paid into a pension in a tax year and still get tax relief. This is called money purchase annual allowance (MPAA).

Flexi-access drawdown (adjustable income)

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

When you move your savings into a flexi-access drawdown 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

  • Not all schemes offer flexi-access drawdown. It is possible to change to a provider that does offer this option. You may have to pay a fee.
  • Flexi-access drawdown is not guaranteed, as you may run out of money. This can happen if:
    • you take out too much of your pension savings
    • you live longer than expected
    • your investments perform badly.
  • If you would like to keep paying into the pension, you will have a reduced annual allowance of £4,000. The annual allowance is the amount that can be paid into a pension in a tax year and still get tax relief. This is called money purchase annual allowance (MPAA).

Annuity

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

If you have or have had cancer, you may qualify for an impaired-life annuity. It usually pays out more than a normal annuity to people with an illness that could reduce their life expectancy. If you do not 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 depends on how much you have in your pension pot and whether you want the income to increase each year.
  • Unlike flexi-access drawdown, there is no risk of running out of money. The income is guaranteed for the rest of your life. Whether an annuity offers good value depends on a number of factors. These include the rate you are offered, how long you live, and the death benefits available.
  • Your pension scheme may offer you its own annuity policy, but this will not 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 depends on:

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

You do not 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 guide will help you consider your options. You can speak to a Macmillan financial guide for free by calling 0808 808 00 00.

I remembered I had an old pension from when I was self-employed. Macmillan explained I could get that in a lump sum. It was like a weight had been lifted.

Cath

I cashed a work pension. I have a lump sum and a monthly payment. I might not get as much when reaching retirement age, but I need the money now.

Alison


Defined benefit scheme

A defined benefit scheme is a type of pension. They are nearly always arranged by your employer. It means they give you a pension when you retire. This can also be called a final salary scheme 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. This can vary, depending on your employer and your pension scheme. You get a lump sum and a regular income for the rest of your life.

How much you get depends on:

  • your salary
  • how long you have worked for your employer
  • the rules of your pension scheme.

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 under 55, 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 is 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
  • 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 get financial advice if you are thinking of doing this. If the value of your defined benefit scheme is £30,000 or more, you have to get financial advice before you can make a transfer.

When you can transfer

Transfers to a defined contribution scheme 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.