In April 2015, Chancellor George Osborne scrapped the obligation to purchase an annuity at retirement and let savers use their pots as a cash machine, taking lump sums or income from age 55, while leaving pensions invested via drawdown.
This allowed their money to grow – but also left them at the mercy of the stock market. That’s a huge worry today, as share prices crash.
If possible, the over-55s should resist cashing in stocks and shares during the current turmoil, when values are sharply down. That will further deplete their pot.
While your money remains invested you’re only suffering paper losses, but by making withdrawals, you crystallise them.
Plus you will also be locked out when the stock market rebounds. Whenever that is.
Here are 10 further questions to ask yourself before making withdrawals.
1. Am I taking money too soon? While you can start withdrawing from your defined contribution (DC) pension from age 55 (rising to 57 in 2028), that doesn’t mean you should rush in.
“The earlier you start taking income, the longer it will need to last, and the less time your investments have to grow,” Selby said.
Withdrawing in a panic today might prove a costly mistake. Stay invested if you can, although it may take time for markets to recover.
The old rule applies: only invest money in stock markets if you can leave it there for a minimum of five years, to overcome short-term volatility like today’s.
2. What’s the right income option? Once you access your pension, you must decide how to manage the remaining funds and have three main options.
Drawdown: Your pension stays invested, and you take a flexible income. This gives control but as we’re seeing today, carries investment risk.
Lump sum withdrawals (UFPLS): Withdraw cash in chunks, with 25% of each sum tax-free.
Annuity: A guaranteed income for life. Ideal for those prioritising stability over flexibility.
You can mix and match these options, Selby said. “You might use drawdown initially then buy an annuity to generate a secure income in later years.”
3. Should I take tax-free cash? You can withdraw 25% of your pension tax-free, up to a maximum of £268,275. But if you simply put the money in a bank account it could be eroded by inflation and the interest might be taxed.
You don’t have to take the full amount at once so be more strategic, Selby said. “If, say, you need £5,000 for a credit card bill, you could withdraw only that amount, leaving the rest to grow.”
4. Will the money purchase annual allowance (MPAA) impact me? Once you start drawing taxable income from your pension, your annual allowance for pension contributions plunges from £60,000 to just £10,000. “This can hit people who plan to keep working while taking pension withdrawals,” Selby said.
To avoid triggering the MPAA, simply take your tax-free cash and delay withdrawing taxable income, he added.
5. How can I minimise my tax bill? Withdrawals from a pension above your tax-free amount are taxed as income. Careful planning is required to avoid unnecessary tax bills.
Selby said withdrawing a big lump sum in one year could push you into a higher tax bracket, while spreading it over two years or more might avoid that.
6. How should I invest? As you approach retirement, reviewing your investment mix is crucial. Leaving everything in shares leaves you at the mercy of stock market volatility, while moving into lower risk bonds may reduce future growth. Build a balanced, diversified portfolio of shares, bonds, cash, property and gold. Today, shares are plunging but the gold price is at an all-time high, offsetting losses.
7. Am I being scammed? Pension freedoms have unleashed an army of fraudsters targeting people’s pension pots. Ignore unsolicited financial advice from cold calls, emails or social media, and beware anyone promising early pension access, high return returns or exotic investments. If unsure, check the Financial Conduct Authority register to ensure you are dealing with a regulated firm.
Selby said: “High pressure tactics are a red flag.”
8. What happens to my pensions when I die? Currently, pensions can be passed on tax-free if you die before 75. From 75, your beneficiaries pay income tax on withdrawals.
Chancellor Rachel Reeves plans to charge inheritance tax (IHT) on unused pensions from 2027, costing money and causing delays. This may require a rethink, possibly advice.
9. Will I get the full state pension? To qualify for the maximum new state pension, you need 35 years of National Insurance (NI) contributions. Check your NI record and plug gaps with NI credits or voluntary contributions.
10. What other assets do I have? If you have ISAs, property, or a defined benefit pension, factor these into your planning too.
Pension freedoms have given people greater control and choice. But they are also risky, especially today. Free guidance is available from government-funded service Pension Wise, via MoneyHelper.