How your workplace pension is paid

Defined benefit and defined contribution schemes

How you get money from your pension depends on the type of scheme you’re in. You can find out more information on the types of workplace pension scheme

Defined contribution schemes

You’ll need to decide how to take your money if you’re in a defined contribution pension scheme.

Defined benefit schemes

You may be able to take some money as a tax-free lump sum if you’re in a defined benefit pension scheme - check with your pension provider. You’ll get the rest as a guaranteed amount each year.

Planning an income for retirement

When planning your retirement income, you should:

• decide the age when you want to retire
• decide how you want to be paid
• research the best deal on a regular payment (buying an ‘annuity’)

Deciding when to retire

Generally, the older you are when you take your pension the higher the payments you'll receive because your life expectancy is shorter.

Deciding how you want to be paid

You can decide how you take money from your pension pot. You should ask your pension provider what options they offer.

In most schemes you can take 25 per cent of your pension pot as a tax-free lump sum. You’ll then have 6 months to start taking the remaining 75 per cent - you can usually:

• get regular payments (an ‘annuity’)
• invest the money in a fund that lets you make withdrawals (‘draw down’)

Depending on your scheme, you may have other options. You get 25 per cent tax free when you

• take a whole pension pot worth up to £10,000 as a lump sum
• withdraw cash from your pension pot (‘uncrystallised funds pension lump sums’)

These options apply to you if you’re in a defined contribution pension scheme - a pension pot that’s based on what you or your employer paid in.

Transfer your pension pot

You can transfer your pension pot to a provider that gives you different options. 

Get regular payments from an annuity

You may be able to buy an annuity from an insurance company that gives you regular payments for life. You ask your pension provider to pay for it out of your pension pot.

The amount you get can vary. It depends on how long the insurance company expects you to live and how many years they’ll have to pay you. When they calculate the amount they should take into account:

• your age and gender
• the size of your pension pot
• interest rates
• your health (sometimes)

There are different kinds of annuities. Some are for a fixed time (for example payments for 10 years instead of your lifetime) and some continue paying your spouse or partner after you die.

You don’t have to buy your annuity from your pension provider. You can shop around to get the best deal.  For advice and guidance on how to shop around for an annuity, visit Money Helper.

Invest the money in a drawdown fund

You may be able to ask your pension provider to invest your pension pot in a ‘flexi-access draw down’ fund.

If you have a ‘capped’ draw down fund, you can keep it or ask your pension provider to convert it to flexi-access draw down. If you had a ‘flexible’ draw down fund, it converted automatically.

From a flexi-access draw down fund you can:

• make withdrawals - you’ll pay a fee to your pension provider for each withdrawal
• buy a short-term annuity - this will give you regular payments for up to 5 years
• pay in - but you’ll pay tax on contributions over a certain amount a year

Keeping your capped draw down fund

Your money will stay invested, and you can keep withdrawing and paying in. Your pension provider sets a maximum amount you can take out every year. This limit will be reviewed every 3 years until you turn 75, then every year after that.

Withdraw cash from your pension pot

You may be able to take cash directly from your pension pot. You’ll be able to:

• withdraw your whole pension pot
• withdraw smaller cash sums - you’ll pay a fee to your pension provider for each withdrawal
• pay in - but you’ll pay tax on contributions over a certain amount a year

These cash withdrawals are called ‘uncrystallised funds pension lump sums’.

When you can't withdraw cash

You can’t withdraw cash (uncrystallised funds pension lump sums) from your pension pot if any of the following apply:

• you’ve already saved over your lifetime allowance amount in pension schemes
• you have some types of lifetime allowance protection
• you’re under 75 and the sums you want to withdraw are bigger than the amount of lifetime allowance you have left

Getting help and advice

You can get free, impartial information about your workplace pension from:

• Money Helper - Pensions and retirement

You can also get impartial advice about workplace pensions from an independent financial adviser. You’ll usually have to pay for the advice. Find out more on how to get information and help with pensions.

Get advice from Pension Wise

You can find out more about your options on Money Helper - Pension Wise, a free and impartial government service that helps you understand your new pension options

Tax on your pension

When you get money from a pension you pay tax on any income above your tax-free personal allowance.

Your pension provider will take off any tax you owe before you get money from your pension pot. You may have to pay a higher rate of tax if you take large amounts and you may owe extra tax at the end of the tax year

To find out what your tax free personal allowance is, what income is taxed and what income is tax free and more about how to get tax-free income from a pension, visit the following pages on GOV.UK.

• Current rates and allowances (GOV.UK)
• What's taxed and what's tax-free (GOV.UK)
• Getting tax-free pension income (GOV.UK)
• Tax on your private pension (GOV.UK)

Look out for pension scams

Pension scams are on the increase. For advice on protecting yourself against pension scams visit the Pension Regulator website at the link below.

• Protect yourself against pension scams - Pension Regulator website