YOUR RETIREMENT OPTIONS

You can take your retirement savings once you reach the Normal Minimum Pension Age. This is currently 55 but will increase to 57 from 6 April 2028. You can take your savings earlier if you're able to retire on the grounds of ill health or have a protected pension age.

Today, retirement is no longer necessarily a single date in the diary. For instance, you may plan to reduce your working hours or do some other part time work in later life. You might want to carry on working and contributing to your pension for a little while after you reach retirement age.

But when you’re ready, there are a range of different options that you can use when you wish to take your pension savings, which are detailed below. You can use several of these options together if your pension allows this, but it’s important to check your pension as all of these options may not be available and you may need to transfer to another pension to access more flexibility. Please speak to your pension provider for further guidance.

However you decide to take your pension savings, the Lump Sum Allowance and Lump Sum and Death Benefit Allowance will apply. In most cases, 25% of the value of your pension plan can be taken as one or more tax-free lump sums, subject to an overall limit of 25% of the Lump Sum Allowance (£268,275). Different rules apply when accessing your savings through Uncrystallised Funds Pensions Lump (UFPLS), which is detailed below.

For further detail and explanations of the different tax implications, visit the pensions and tax module.

1. A guaranteed income for life

Also called an annuity, a guaranteed income for life offers a regular income for the rest of your life – so you'll know exactly what you'll receive and when. Keep in mind annuities, once selected, cannot be changed or cancelled after the initial cancellation period.

You can normally take up to 25% of your pension savings as tax free cash, with the balance used to purchase an annuity. The income received from the annuity is taxed as income.

2. Flexi-access drawdown

You can normally take up to 25% of your pension savings as tax free cash. The balance will be moved into flexi-access drawdown, where it will remain invested and its value can go up and down.

You can take regular and one-off taxable income payments from the amount invested in flexi-access drawdown, as and when you wish. You should monitor the value of your investments in flexi-access drawdown or you risk running out of money.

It's important to note that once you start taking income from drawdown, the Money Purchase Annual Allowance of £10,000 (2024/2025 tax year) applies which reduces the amount that can be paid into your pension each year before a tax charge applies. This is an important consideration if you (or your employer on your behalf) are still contributing to your pensions.

3. Take it as cash

There are two main ways you can take your pension savings as cash:

Small pot – You can take your whole pot as a lump sum provided it is not worth more than £10,000. You can only take up to three pensions as a small pot, and if you have already taken three small pots, this will not be available to you. In this instance, you could take a UFPLS, detailed below, instead.

With a small pot, 25% of the small pot is tax free and the balance is subject to income tax. Basic rate tax will be deducted by your pension provider and you will need to contact HMRC if you have overpaid tax or are due to pay more tax.

A small pot does not need tested against the Lifetime Allowance and the The Money Purchase Annual Allowance does not apply if you take a small pot.

Uncrystallised Funds Pensions Lump (UFPLS) – You can take all or part of your pension savings as a UFPLS.

For each lump sum taken, 25% is tax free and the balance is subject to income tax. Emergency tax will be deducted by your pension provider and you will need to contact HMRC if you have overpaid tax or are due to pay more tax.

A UFPLS needs tested against the Lump Sum Allowance of £268,275 and the Lump Sum and Death Benefit Allowance of £1,073,100.

• If you are under 75 and take a UFPLS, the amount you can take is limited to your available Lump Sum Allowances.  25% of this will be tax-free with the balance subject to income tax.
• If the amount you wish to take as a UFPLS is more than your available Lump Sum Allowances, the excess will be treated as a lump sum allowances excess lump sum and will be subject to income tax.
  • If you are over age 75 and take a UFPLS, the amount you can take tax-free is limited to 25% of your available lump sum allowances. The remainder will be subject to income tax.
    
  • We will deduct income tax at an emergency rate when the payment is made. You will need to contact HMRC to reclaim any overpaid tax or pay any more tax that may be due.

It's important to note that if you take a UFPLS the Money Purchase Annual Allowance of £10,000 (2024/25 tax year) applies, which reduces the amount that can be paid into your pension each year before a tax charge applies. This is an important consideration if you (or your employer on your behalf) are still contributing to pensions.

If you’re considering taking your pension as cash, you should consider the tax implications and how long your savings will last you and if it’s enough to support yourself later in life.

If you plan to take your pension savings this way, we recommend you speak to a financial adviser. You can find an adviser at unbiased.co.uk. Advisers will normally charge for any advice they gave.

4. Leave it for now – defer your pension

If you don’t need access to your pension savings yet, you might want to think about just leaving your savings invested. Be aware however, that some pensions have benefits or guarantees that only apply on your selected retirement date, and you could lose them if you defer it.

Some pensions, including some Scottish Widows pensions, also require you to take your benefits before age 75 so you should double check the rules that apply to your pension scheme with your pension provider.

Ill health and Serious ill health

If you are permanently incapable of continuing to work in your current occupation, you may be able to access the above retirement options before the normal minimum pension age of 55 (changing to 57 in 2028). The tax implications are the same as explained above.

If you have a life expectancy of less than a year, you may be able to take a full lump sum tax free up to the Lump Sum and Death Benefit Allowance. Anything over the Lump Sum and Death Benefit Allowance is taxed as income at your standard marginal rate.

There are some conditions that you must meet:

• You must have some Lump Sum and Death Benefit Allowance left
• You must be under age 75 (if you are over age 75 the lump sum is taxed as income)
• It is not available from savings already in drawdown
• The Money Purchase Annual Allowance will not be triggered.

For more information on your pension options, visit our pension options page on the Scottish Widows website.

Tax treatment depends on individual circumstances and tax rules, both of which can change in the future.

This is based on Scottish Widows understanding of the tax position in the 2024/25 tax year.