Have you thought about your income options for retirement? Determining how much pension income you will receive and how you will fund your later years, is a critical aspect of retirement planning. To further assist you, here are the top 10 questions on the current pension rules that cover topics from tax-free cash and pension allowances, to pension transfers and annuities.

1. Am I allowed to take a tax-free cash sum?

Once you reach retirement age you will have the ability to withdraw up to a quarter of your pension as a tax-free lump sum. This could provide a much desired income boost for your early years of retirement and could effectively allow you to reap benefits such as a vacations, purchasing a new car, making improvements to your home or repaying a pending mortgage for the property you live in. Even though this could be a tempting option, our financial advisers agree that you need to evaluate all your options before you do so, as this may have lasting impact on your finances.

You may need to ask yourself: “When should I draw income from my pension? What is your present and future retirement plan? Are there any other alternatives that would allow me to achieve my goals? Is this going to improve my lifestyle significantly? Would I be limiting myself with any other future opportunities?”

You may be thinking that taking money out of your pension is a cost-effective move, but you need to consider the consequences. When we take funds from our retirement accounts and invest them elsewhere for growth or other purposes like paying off debt, we effectively limit our potential for growth on that money if it were to remain invested in our pension.

According to figures by investment firm Fidelity, if a person at the age of 55 withdraws £25,000 of tax-free cash out of a £100,000 pension pot and made no further contributions, in 10 years’ time, their pension would be worth £122,167.

Alternatively, if the same person did not withdraw any funds from their £100,000 pension pot, in 10 years’ time their pension pot would have grown to an estimated £162,000.

2. Are there any plans for the UK government to abolish tax – free cash withdrawals?

With the ongoing COVID-19 pandemic challenges, pension taxation changes can be made by the UK government at any given moment.

However, our financial advisers believe that the abolishment of tax-free cash withdrawals from your pension is highly unlikely due to the potential backfire and turmoil this may cause (especially with all-time records of Brits reaching retirement). Tax-free cash has survived WWII and a few recessions, and although we cannot predict the future, we don’t think it will happen anytime soon.

3. Could new lifetime allowance cuts be introduced in the future?

Your lifetime allowance is the amount you are able to pay into a pension over your lifetime, and your annual allowance is what you can pay year-over-year, all of which are entitled to tax relief on your contributions. Currently, the lifetime allowance in 2021/22 is capped at £1,073,100, and 100% of your earnings for the annual allowance, which is subject to a £40,000 cap.

Pension savings are indeed an easy target for politicians and over the years, these allowances have been gradually reduced. Even with the current developments in mind it is still unlikely that we will see further restrictions imposed on the 25% pension tax free withdraw.

However, data suggests that there is in fact a decline in the lifetime allowance as in 2008 it was approximately £1.8 million, while retrospectively the annual allowance has also declined from its peak in 2010.

4. Should I be considering a pension transfer?

It’s not surprising that many people are considering trading in their pension for a large cash lump sum, as they are often offered 20 to 30 times their promised income. However, the decision should be carefully thought out and we highly advise you get professional financial advice on your pension transfer^. In fact, if you are looking at transferring £30,000 or above, getting professional financial advice becomes legally mandatory^.

Regardless, a pension transfer could be a valid alternative if you fall into one of the following categories:

  • you are not married – people who aren’t married would not normally get the benefits of a spouse’s pension.
  • you are physically ill – people who are unwell and are not likely to have a long retirement, might benefit from having access to funds earlier in their life.
  • you have other sources of income – having other sources of income, such as a buy-to-let property could function as a financial cushion if you experience a situation in which your remaining pension fund is not enough to cover your living expenses.

5. Is buying an annuity a valid option?

New data shows that there is increased demand for drawdown sales as opposed to annuity sales. Drawdown sales offer a flexible approach and give you an opportunity for more control, while pension annuities have a more restrictive nature and often offer lower rates.

But there are indeed some benefits that make annuities a financial product that is still desired. They can provide people with guaranteed lifetime income so it’s no wonder they’re still popular in this day and age.

You could also take a hybrid retirement approach. While you could still use an annuity to supplement your basic expenses and preserve your pension for any possible future investments, you can alternatively use drawdown at the start of your retirement and then purchase annuity bonds, as you get older. Usually, you would get improved terms and conditions as you’re moving to the later stages of your life.

6. How much can I withdraw from my pension?

Making sure your money lasts as long as possible can be a challenge.

Many people underestimate the amount of money they can safely withdraw from their pension. According to Interactive Investors, many people assume they can withdraw around 7% a year from their retirement fund without fear of running out of money, although the reality is likely to be significantly less than 7%. They also concluded that a sustainable rate of withdrawal is nearer to 3.5%, and in all cases fell short of the 4% rule often quoted. This is based on the assumption that each strategy would provide a 95% level of certainty of the income lasting 25 years to age 90.”

It’s also not just about how much you have, but what your goals and priorities are too. Some people want to make the most of their early years of retirement while they’re still healthy, while others want to keep as much cash for care or to leave their family an inheritance later in life.

7. Can I withdraw my entire pension as a lump sum?

The latest pension freedoms introduced in April 2015 have opened up a world of opportunity for you. You can withdraw all the money out as a lump sum but just because there are options to do so doesn’t mean they should be used.

As you withdraw money from your pension, it will be taxed at whatever rate of tax is imposed on your income. This means that only the first 25% will be a tax-free lump sum and anything besides that, will be taxed.

It’s important to do what you need, not just settle for whatever is available. For example, if you plan to withdraw money from your pension and deposit it into your bank account where the rates are typically low and you will lose all the tax benefits, then we would suggest not proceeding with that option.

8. Do I have to take income from my pension?

The short answer is no.

You may still be working and have other income sources so it might make sense for you to leave your pension as is. Doing this has some benefits as it can provide tax-efficient growth, give you the ability to pass the money tax free to your beneficiaries if you die before 75.

9. How much would I be taxed if I withdraw money from my pension?

Many people are not aware that they could be taxed on their retirement savings.

If your tax-free cash has already been taken and you want to withdraw more money from your pension, this will be taxed as it will be classified as “income”. However, if your earnings are below the annual tax allowance, then you won’t be liable to pay tax.

If you would like to better understand how and if your pension will be taxed, it is usually best to consult with a financial adviser.

10. Will I be able to cash in my annuity into a single lump sum withdrawal?

The government had announced plans to create a secondary annuity market that would have enabled dissatisfied holders of guaranteed lifetime income, such as pensioners and semi-retired individuals who are unable or unwilling to live on their remaining capital at retirement, to request a single lump sum in exchange for their annuities.

The idea is that people can trade in their monthly guaranteed income for cash while still having some safety net if, financing options become volatile during their lifetime. However, there’s been no concrete start date set yet, as the process is complicated.


Although we all have different retirement goals depending on what life stage we’re at, our goals can be broadly categorised into essential needs, lifestyle wants and legacy aspirations. Getting pension advice can be one of the most beneficial things you can do for your personal finances and long-term financial wellbeing.

To identify which pension options are right for your individual circumstances or to find out more, please contact us +44 (0) 2033 935 920.


Source: Interactive Investor, Your top 10 pensions questions answered

*Capital at risk. The value of your pension can go down as well as up, and past performance is no guarantee to future performance.

^Headway Wealth cannot give defined benefit pension transfer advice.