Every way you can take money out of a pension (I think)
My complete list, in plain English. The "I think" is doing real work in that title.
The usual disclaimer
I am not a financial adviser. I am someone who has spent two years Googling aggressively, building a calculator, and modelling my own retirement to death. This post is me laying out my understanding so that people who know better can correct it. Tax rules change and your situation is your own.
Two years into building a pension calculator, I thought I knew all the ways you can get money out of a defined contribution pension. Then a reader emailed about the small pots rule, which I had never heard of, and I started wondering what else I'd missed.
So this post is my complete list, written the way I'd explain it to a friend in the pub. It is also an open invitation: if you know a route out of a pension that isn't here, or I've got one of these wrong, please tell me. There's a Contact button at the top of this site and I read everything. Corrections get folded back into this post with credit.
Everything below is about defined contribution pensions (SIPPs, workplace pots, the kind with a fund value). If yours is a defined benefit pension (a promise of income, like a final salary scheme), it's a different world and mostly not a "withdrawal" decision at all; I've added a note at the end.
And to make each route concrete, meet Sandra. She's 60, has just stopped work, and has a £200,000 pension pot, plus a forgotten £8,000 personal pension from a job in the nineties. No other income until her State Pension at 67. All the tax below uses 2026/27 rates (£12,570 personal allowance, 20% to £50,270, 40% above). We'll run her through every door.
1. Leave it alone
Doing nothing is a choice, and sometimes the best one. The pot stays invested and growing, no tax is triggered, and you live off other money (ISAs, savings, part-time work). One wrinkle worth knowing: from April 2027, unused pension pots are due to come into inheritance tax, which used to be the big argument for touching the pension last. It's still often right to defer, just no longer automatic.
Sandra's version: she touches nothing and lives on savings. At 5% growth her £200,000 is about £255,000 by 65. Tax paid: £0. The taxman's bill is merely postponed, not cancelled, but the pot did five years of compounding first.
2. Flexi-access drawdown, the "classic" route
You "crystallise" the pot: take up to 25% as tax-free cash up front (the lump sum everyone talks about), and the other 75% moves into a drawdown account where it stays invested. You then draw income from it whenever you like, taxed like a salary. You don't have to crystallise the whole pot at once; you can do it in slices over years, which is usually the more tax-efficient version (sometimes called phased drawdown).
Sandra's version: she takes £50,000 tax-free on day one (new kitchen, mortgage cleared) and moves £150,000 into drawdown. She then draws £15,000 a year. With no other income, only £2,430 of that pokes above her personal allowance, so the tax is £486 a year and she keeps £14,514. Year one in her pocket: £64,514, of which the taxman took £486.
3. UFPLS, the one with the terrible name
"Uncrystallised funds pension lump sum" is the worst piece of branding in personal finance, but the mechanics are lovely: every single withdrawal is automatically 25% tax-free and 75% taxable. No big upfront decision, no separate lump sum. The tax-free benefit gets spread across your whole retirement, a little in every withdrawal. This is what my simulator models by default, and the FAQ explains why: spreading the 25% keeps more of your income inside lower tax bands, year after year.
Sandra's version: no kitchen this time. She draws £20,000 a year: £5,000 arrives tax-free, £15,000 is taxable, and after her personal allowance the bill is the same £486. She keeps £19,514 of every £20,000, an effective tax rate of 2.4%, and her remaining pot is still uncrystallised with its 25% intact.
4. Buy an annuity
Swap some or all of the pot for a guaranteed income for life. You can take your 25% tax-free first and annuitise the rest. Level or inflation-linked, single or joint life, with or without a guarantee period. The knock on annuities is inflexibility; the case for them is that the income cannot run out. My own plan is a hybrid: drawdown first, then maybe an annuity in my seventies when the certainty starts being worth more than the upside.
Update, 6 September: this section turned out to be two routes wearing one coat. Terry Jordan of Just Group pointed out the fixed-term annuity: instead of income for life, you buy a guaranteed income for a set term (typically 3 to 30 years), often with a guaranteed maturity sum at the end. It sits under drawdown rules, so the pot has to be crystallised to buy one, and it fills the gap between "locked in for life" and "fully exposed to markets". Call the lifetime version 4a and the fixed-term version 4b.
Sandra's version: she takes her £50,000 tax-free, then swaps the remaining £150,000 for a level single-life annuity. At the roughly 6.5 to 7% rates quoted for a 60-year-old lately, that's around £10,000 a year for life. Until her State Pension starts it sits entirely inside her personal allowance: tax £0. From 67 the two stack up and she pays about £2,000 a year. Inflation-linked or joint-life versions start meaningfully lower. It never runs out, and it never grows either.
5. Take the whole lot in one go
Completely legal, and almost always a tax disaster. The first 25% is tax-free; the remaining 75% lands as income in a single tax year. If you're tempted by this one, that's exactly what the year-by-year tax view in the simulator is for.
Sandra's version, and look away if squeamish: £50,000 comes tax-free, then £150,000 lands as income in one year. Income over £100,000 also strips away her personal allowance entirely, so the bill is £7,540 at 20%, £34,976 at 40% and £11,187 at 45%: £53,703 of tax, and she banks £146,297 from a £200,000 pot. Drawing the same pot as £20,000-a-year UFPLS instead costs about £486 × 10 = £4,860 in total. Cashing out cost her almost £49,000 for the privilege of getting it all on one day.
6. The small pots rule, the obscure one
If a personal pension pot is worth £10,000 or less, you can cash the whole thing in as a "small pot lump sum": 25% tax-free, 75% taxed, same as UFPLS. So why bother? Two quiet advantages: it doesn't trigger the MPAA (more on that below) and it doesn't use up your lifetime tax-free cash allowance. You can do this for up to three personal pots (workplace pots are uncapped). This is the one the reader taught me.
Sandra's version: that forgotten £8,000 pot from the nineties gets cashed as a small pot: £2,000 tax-free, £6,000 taxable (which, in a year when it fits inside her allowance, means no tax at all). Crucially, if she later fancies consultancy work, she can still pay up to £60,000 a year into her pension, because a small pot doesn't trip the alarm that flexible withdrawals do.
7. Mix and match
Nothing forces one method. Different pots can take different routes, and one pot can be sliced: UFPLS from your SIPP while a small pot gets cashed, part of the fund annuitised at 70 while the rest stays in drawdown. Most real retirements I've modelled end up as a blend, usually without the person ever being told the names of the things they're blending.
Sandra's actual plan, probably: cash the small pot at 60, draw £20,000 a year by UFPLS until the State Pension lands at 67, then drop the draw to around £10,000 so the two together stay mostly in the basic rate band, and maybe swap what's left for an annuity at 75. Total tax across the first decade: a few thousand pounds, not fifty. Nobody at any point tells her she's "blending UFPLS with phased annuitisation", which is fine, because she's just living off her pension.
The three traps that sit across all of these
Emergency tax on your first withdrawal. HMRC taxes your first flexible withdrawal as if you'll take that amount every month forever, which massively overtaxes it. Sandra's first £20,000 UFPLS would have roughly £5,100 taken instead of £486; the £4,600 difference comes back, but only after a form (P55) or at year end. It catches almost everyone. I wrote a whole post on it.
The MPAA. The moment you take any taxable income flexibly (UFPLS, or income from drawdown), your annual pension contribution allowance drops from £60,000 to £10,000, permanently. Taking only the tax-free cash, or buying a lifetime annuity, doesn't trigger it. This matters enormously if you might work again.
The lifetime cap on tax-free cash. All your 25% slices count against one lifetime allowance of £268,275. Big pots hit it; the simulator shows the year it runs out.
The defined benefit footnote
DB pensions (final salary and career average schemes) pay an income; there's no pot to withdraw. The two exceptions I know of: a tax-free lump sum by "commutation" (swapping some income for cash, at a rate the scheme sets), and "trivial commutation" which lets you cash in DB benefits worth £30,000 or less in total. Transferring a DB pension into a pot to unlock the routes above is possible over £30k only with regulated advice, and is usually a bad idea; that's one of the few places I'll be that direct.
Update, 6 September: I asked what I'd missed, and the professionals answered
I posted this list on LinkedIn and asked the pension industry to correct me. They did, generously. Here's what the original list missed, with credit where it's due.
Routes I didn't have:
- Fixed-term annuities (Terry Jordan, Just Group): now folded into section 4 above as route 4b.
- Scheme pension, CDC income, and smoothed with-profits funds (Richard Hulbert): a scheme can pay your pension directly rather than you drawing it; collective DC schemes (Royal Mail's is the first big one) pay a target income from a shared pot; and some providers offer "secure income" funds that smooth market returns. All three are routes to income that aren't on my original list because I'd never met them. That's rather the point of asking.
- The purchased life annuity trick (Jane Hodges, chartered financial planner): take your 25% tax-free cash, then use it to buy an annuity outside the pension. A purchased life annuity is taxed more gently than pension income, because part of each payment counts as your own capital coming back rather than income. She also points out you can draw the tax-free cash itself in slices as income (phased), and even hold a fixed-rate annuity inside a SIPP. The mix-and-match section undersold how far the mixing goes.
Trap refinements:
- The emergency-tax dodge (Stephen Cheng-Whitehead): make a very small first withdrawal (say £100). That forces HMRC to issue a proper tax code to your provider, so your first real withdrawal is taxed correctly. The code can take weeks to arrive, so do it well before you need the money.
- Small pots must be cashed whole (Stephen again): it's all or nothing per pot, no partial withdrawals.
- Consolidating can destroy the small-pot advantage (Dave Morgan): merge a £5,000 pot into your SIPP and it stops being a separate small pot; the option is simply gone. Check before you tidy up your pensions.
Alan Chaplin also suggested showing how the State Pension changes the sums (want £35k a year from 60, and the draw from your pot falls to roughly £23k when the State Pension arrives). Happily that one I can answer with a link: the simulator models exactly that, year by year.
So: what else have I missed?
The list now stands at ten-ish routes and five traps, and it got better because people corrected it, which was the entire point. If you know a way out of a pension that still isn't here, or you've spotted an error, use the Contact button at the top of the page. I read every message and I'll update this post with anything I learn, credited if you'd like.
And if you want to see what any of these routes does to your own numbers, year by year and tax band by tax band, that's what the simulator is for. Free, no login, nothing saved on our servers.