Understanding Pension Freedoms
What does pension freedoms mean?
Pension freedoms refer to a set of changes introduced in April 2015 that significantly altered how people can access their defined contribution pensions.
These rules apply to most workplace and personal pensions where contributions are invested to build up a pot of money over time.
From age 55 (rising to 57 from 2028), individuals have full access to their pension pots and can choose how and when to withdraw funds.
How accessing pensions changed
Before 2015, the most common route was to use the pension pot to buy an annuity, which provided a guaranteed income for life. Annuities offered security but limited flexibility.
Pension freedoms removed the requirement to buy an annuity, allowing individuals to make their own decisions about how to use their pension savings. This means you can take all your pension at once, withdraw it in stages, leave it invested, or use a combination of methods.
However, this flexibility comes with the need for careful planning, as it is now up to the individual to ensure their pension savings last throughout retirement.
Key changes introduced in 2015
The 2015 reforms introduced several major changes for defined contribution pensions:
- You can access your entire pension pot from the age of 55 (rising to 57 in 2028)
- You are no longer required to buy an annuity
- You can withdraw money in lump sums, enter drawdown, or use a combination of methods
- You have more flexibility in how you pass your pension on after death
These changes do not apply to defined benefit pensions (such as final salary schemes), which provide a guaranteed income based on your salary and length of service.
If you want to access pension freedoms with a defined benefit pension, you would need to transfer it into a defined contribution scheme.
This is a complex financial decision that typically requires regulated advice, particularly because you are giving up a guaranteed income.
Your main options under pension freedoms
Leaving your pension untouched
You are not required to access your pension as soon as you reach the eligible age. You can choose to leave it invested, allowing it to continue growing tax-free.
This approach may suit those who are still working, have other sources of income, or do not need the funds yet. For example, someone still employed at 60 might choose to delay withdrawals until they retire fully at 67.
Taking lump sums on demand
You can take lump sums from your pension pot as and when you need them. These are known as uncrystallised funds pension lump sums (UFPLS). Each withdrawal is treated individually for tax purposes.
Each time you take a UFPLS:
- 25% of the amount is paid tax-free
- The remaining 75% is treated as taxable income and added to your total income for that tax year
For example, if you withdraw £20,000, £5,000 will be tax-free and £15,000 will be subject to income tax. If this pushes you into a higher tax bracket, you could pay a significant tax bill.
Drawdown
Drawdown involves moving your pension pot into a flexi-access drawdown account. Up to 25% of the total pot can be taken tax-free at the outset. The remaining funds stay invested and you can withdraw income from them as needed.
This option offers flexibility, as you control both the amount and timing of withdrawals. However, your pension remains exposed to investment risk. If your investments underperform, or if you withdraw too much, your pot could shrink faster than expected.
For instance, someone withdrawing £10,000 a year from a £100,000 pot might find it depleted in just over a decade, especially if investment returns are low or volatile.
Annuity
An annuity converts your pension pot into a regular income, usually for life. You can buy an annuity with all or part of your pot. The income level depends on factors such as your age, health, and interest rates at the time of purchase.
While annuities offer long-term security, they are less flexible. Once purchased, they generally cannot be altered.
For example, someone aged 65 with a £75,000 pot might be offered a fixed income of around £4,500 per year for life, depending on market rates and personal circumstances.
Combining different approaches
You are not limited to one option. Many people choose to mix and match. For example, you might take a lump sum to pay off your mortgage, use some funds for drawdown to provide flexible income, and buy an annuity later in life to guarantee a baseline income in older age.
This approach allows you to tailor your pension use to your circumstances, but it also requires active management and ongoing decisions.
How the 25 percent tax-free amount works
You are entitled to take up to 25 percent of your total pension pot tax-free. This can be done in different ways depending on how you access your pension:
- You can take the full 25 percent in one go before entering drawdown or buying an annuity
- You can spread it across multiple withdrawals, where 25 percent of each withdrawal is tax-free (as with UFPLS)
Some people choose to take the tax-free amount gradually to manage their tax liability. For example, someone working part-time might withdraw £16,000 annually using UFPLS. They would receive £4,000 tax-free, with the remaining £12,000 taxed, potentially staying within the basic rate tax band.
Taxation of pension withdrawals
Withdrawals beyond the tax-free portion are taxed as income. The amount you pay depends on your total income for the tax year, including earnings, pension income, and any other taxable income.
For the 2025/26 tax year, the personal allowance is £12,570. If your total income stays below this, you pay no income tax.
If you exceed this threshold, you pay:
- 20 percent on income between £12,571 and £50,270 (basic rate)
- 40 percent on income between £50,271 and £125,140 (higher rate)
- 45 percent on income over £125,140 (additional rate)
Large pension withdrawals can unintentionally push you into a higher tax band. For example, taking £40,000 from your pot in one tax year could result in significant tax if it is added to other income.
Initial withdrawals may be taxed using an emergency tax code, which can result in overpayment. You may need to claim a refund from HMRC.
Using multiple options over time
You do not have to stick with one method of accessing your pension. You can change your approach as your circumstances evolve.
For example:
- Take small lump sums during semi-retirement
- Leave your pot invested until later life
- Use drawdown in your 60s and purchase an annuity in your 70s
- Withdraw your tax-free cash gradually to keep income tax low
This flexibility allows you to respond to changes in income needs, health, or market conditions.
However, it also requires regular review and an understanding of how each option affects your long-term finances.
Risks and limitations of pension freedoms
While the pension freedoms offer greater flexibility, they also introduce new risks. Key issues to consider include:
Running out of money
There is no guarantee that your pension pot will last for your entire retirement. If you withdraw too much early on or live longer than expected, you could deplete your funds.
Life expectancy in the UK continues to rise, and many people underestimate how long they may need their pension to last.
Investment risk
If you use drawdown, your money stays invested. This means it can grow, but it can also lose value. Poor market performance, high fees, or low interest rates can all affect the sustainability of your withdrawals.
Tax implications
Taking large sums in one year can result in higher income tax bills. It is important to plan withdrawals carefully to avoid unintentionally triggering higher rates of tax or losing entitlement to means-tested benefits.
Inflation
Inflation reduces the spending power of your withdrawals over time. If your income does not keep pace with rising prices, you may struggle to maintain your standard of living in later years.
Pension scams
Scams targeting pension savers have become more common since the introduction of pension freedoms. These scams often involve promises of high returns, early access to your pension, or pressure to make quick decisions. Once funds are withdrawn, they can be difficult to recover if lost to fraud.
Where to find guidance and advice
Making decisions about how to use your pension is complex and can have long-term consequences.
Reliable support is available from several sources:
- Pension Wise. A government-backed guidance service available through MoneyHelper. Free appointments are available to anyone aged 50 or over with a defined contribution pension. These sessions help you understand your options but do not offer personal recommendations.
- MoneyHelper. Provides tools, calculators, and impartial information on pensions and retirement planning.
- Regulated financial advisers. For personalised advice that considers your full financial situation, a regulated financial adviser can help. This is especially important for those considering pension transfers or managing large pension pots. Adviser fees apply, and it is important to ensure they are authorised by the Financial Conduct Authority (FCA).
Frequently asked questions
Can I take my whole pension at once?
Yes. You can withdraw the entire amount in one go, with 25 percent tax-free and the remainder taxed as income. However, doing so may result in a high tax bill and leave you with no income later in retirement.
Is it better to take smaller amounts gradually?
In many cases, yes. Smaller withdrawals can help you manage your tax liability, keep your income within a lower tax band, and stretch your pot over more years. This also allows you to adjust your withdrawals based on your changing needs.
Do I need to stop working to access my pension?
No. You can access your pension from age 55 (57 from 2028) whether or not you are working. However, drawing income early may reduce the amount available later, so it is important to consider whether you need the money immediately.
Can I still contribute to a pension after taking money out?
Yes, but with limitations. If you access your pension flexibly (e.g. through drawdown or UFPLS), the money purchase annual allowance (MPAA) applies. This reduces your annual allowance for new contributions from £60,000 to £10,000. This rule is designed to prevent people from recycling pension withdrawals into new contributions to gain extra tax relief.
