It’s now more than 10 years since the ‘pension freedoms’ reforms announced by former chancellor George Osborne in his bombshell 2014 Budget took effect in the UK. These changes fundamentally upended the retirement system and the income choices available to millions of Brits.

That decision at a stroke opened up a whole new world of choice and flexibility to people accessing their retirement pot from age 55. The reforms have been hugely popular, enabling retirees to design an income plan that fits their lifestyle and placing responsibility for ensuring that pot lasts throughout their lifetime firmly on the shoulders of individuals. That responsibility means you need to be engaged when drawing your pension, so here are five important things you should ponder when you reach that point.

1. If you’re accessing your pension for the first time, is now the right time to do it?

You can access your ‘defined contribution’ (DC) retirement pot from age 55, with this minimum access age set to rise to 57 by 2028. When you access your pension for the first time, you can also get up to a quarter of your pot completely tax free. However just because you can do something doesn’t necessarily mean you should. In particular, the earlier you start taking an income, the longer that income will need to last – and the less opportunity your fund, including the tax-free cash entitlement, will have to enjoy long-term investment growth.

When deciding how and when to access your retirement pot, the value of other assets will be a significant consideration for lots of people. If you have a significant defined benefit (DB) pension, for example, you might be comfortable taking larger withdrawals from any DC pensions you have. Equally, those with ISAs or property investments will need to factor those into their retirement income planning.

2. Which retirement income option should I go for?

Whenever in life you choose to access your pension, to get your tax-free cash you will need to choose an income option for the rest of your fund. The most popular avenue is ‘drawdown’, whereby your pension remains invested and you take a flexible income to suit your needs. This gives you flexibility over how you take an income but requires you to be comfortable taking investment risk and having responsibility for managing your withdrawals sustainably.

You can also choose to buy an ‘annuity’, an insurance product which pays a guaranteed income for life. These are generally more suitable for people who don’t want to take any investment risk and prioritise income security. If you go down this road, it’s important to shop around for the right product, because once you buy an annuity you can’t change your mind.

The other main option is to take ad-hoc lump sums direct from your pension, with a quarter of each lump sum available tax-free. These are sometimes referred to in the jargon as ‘uncrystallised funds pension lump sums’ or UFPLS. It’s also perfectly possible to combine these income options to suit your needs. For example, you could buy an annuity to pay your fixed costs and retain flexibility and the potential to enjoy long-term growth with the rest. Equally, you could aim to take a flexible income through drawdown in the early years of retirement and then buy an annuity when you’re a bit older and likely to get a better rate.

3. Have a plan for your tax-free cash

As mentioned earlier, when you access your pension you can take up to a quarter of your pot tax-free. For most people, the maximum tax-free cash they can take over their lifetime is £268,275. Before taking your tax-free cash, make sure you have a plan for the money. If, for example, you take your full entitlement out and then just shove it in a bank account, the money will risk being eaten away by inflation over time, and the interest will also potentially be liable to tax.

4. Planning to keep paying into a pension? Watch out for the ‘money purchase annual allowance’

One thing you need to be aware of when accessing taxable income flexibly from your pension for the first time is the impact it will have on your annual contribution limit or ‘annual allowance’. Usually, you can contribute up to £60,000 per year into your retirement pot tax-free, but if you flexibly access your pension, for example through drawdown or by taking an ad-hoc lump sum, your annual allowance drops to £10,000. Furthermore, you lose the ability to ‘carry forward’ unused annual allowances from the three prior tax years in the current tax year.

5. Planning to make large withdrawals? Consider the impact of income tax

Taking large withdrawals can leave you without enough left in your pension later in retirement, but it can also result in you paying more income tax than is necessary. For example, if someone with no other taxable income chose to take a £20,000 taxable withdrawal in 2024/25, they would pay 0% tax on the first £12,570 and 20% tax on the remaining £7,430, leaving a total income tax bill of £1,486. If, however, they took a £10,000 withdrawal in 2024/25 and a subsequent £10,000 withdrawal in 2025/26 and had no other taxable income in both tax years, they would pay no income tax at all as both withdrawals would be below their £12,570 personal allowance. The pension freedoms do allow you to manage your tax situation better than a rigid annuity which pays you each tax year no matter what your situation. But as ever you need to do your homework around the tax bands which will apply to you to minimise the pension money you hand over to HMRC.

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