Pension reforms: what you need to know and what to do about it

Written by the Money Advice Service

Pension rules have just undergone a massive shake-up, and the changes will have a big effect on how you access your money once you retire.

The pension freedom reforms

In the past, most people who had built up a defined contribution pension (personal or workplace pensions where you pay into your own pension pot) could usually take up to a quarter of their pot as tax-free cash when they retired. The rest was usually turned into a guaranteed retirement income for life, by buying what’s called an ‘annuity’.

The new rules have given people with defined contribution schemes far more choice over what they can do with their pension pots. For example, retirees might now consider taking a cash lump sum and investing in things like buy-to-let properties, although there are risks here.

If you are in a defined benefit pension scheme (also known as an employer’s salary-related pension scheme such as a final salary or career average scheme) you will not be affected by the new rules whilst within the scheme.

The new rules

Usually unless you are in very poor health, you need to be aged 55 or over to access your pension pot. When you do, there are now several ways you can access your pension fund. You can:


  • buy an annuity.
  • keep your pension fund invested to provide you with a flexible retirement income – called drawdown (the income is not guaranteed for life).
  • take small cash sums from your pot when you want them.
  • take all your pot as cash in one go.
  • mix the different options.


Many don’t have a single pension pot, and if mixing your choices you can:


  • use different parts of one pension pot
  • use different pots for different options
  • combine smaller pots for one or more options.


If you take it all as cash, you can usually take up to 25% of the withdrawal tax-free and you then pay tax on the rest at your marginal, or highest, tax rate. If you choose the annuity or drawdown options you can take up to 25% of the amount used for this option as tax-free cash. The rest can be used to buy an annuity or enter a drawdown arrangement. You then may have to pay tax on the income you get from these.

Not all providers will offer all options – but you have the right to shop around.

You can find out more in the Money Advice Service’s guide: Options for using your pension pot.

Where to get help

There’s a lot to take in – and a lot of options to consider. Before you decide what to do we recommend you make the new Pension Wise service your first port of call and then consider getting further financial advice.

Pension Wise is a government service that has been set up to give free and impartial face-to-face or telephone guidance.

Pension Wise can help you:


  • Understand the things to think about when considering your choices, such as your plans to continue working, your personal and financial circumstances, and leaving money after you die.
  • Understand the different options for accessing your pension pot, and the potential advantages and disadvantages of each.
  • Understand the tax implications of each choice.

However, it won’t recommend companies or tell you how to use your pension pot or invest your money.

Read the Money Advice Service’s guide: Understanding what Pension Wise is and how to use it.

What to watch out for

Any cash you take from your pension pot with the exception of the tax free element is added to everything else you earn in the year – so you’ll pay Income Tax on this in the usual way. Taking a lump sum of cash or income could push you into a higher tax bracket and you could end up paying higher-rate (40%) or even additional-rate Income Tax (45%) on the lump sum or any income. You might also miss out or have your payments reduced on some means tested benefits if you no longer meet the eligibility requirements around income and savings.

What are the main pension investment options?

Most people choose to invest their pension in funds that usually consist of a mix of global shares and government bonds, because spreading – or diversifying – your investments between different types of asset is a good way of managing risk. You could also diversify your investments in this way yourself, by dividing your pension savings between a range of specialised funds. But this usually requires more time and financial knowledge.

Many people begin saving for retirement by investing in a fund or funds mostly holding shares, and then start to lower the risk profile of their investments by switching to less risky government bonds as they get closer to retirement

Extra costs that come with investing in property

If you’re thinking of investing some of your pension pot in a residential property, you should be aware your money becomes subject to inheritance tax once it’s outside of the pension, and maybe even capital gains tax if the building is not your main home and grows in value.

On top of these taxes you may need to cover Stamp Duty or the Land and Buildings Transaction Tax if you live in Scotland, solicitor costs and completion fees.

Buy-to-let properties come with even more costs. You may have to pay for letting agents and finding tenants, any emergency repairs and general maintenance costs. An empty property between tenants means no money coming in. Landlords also need to buy special landlord and rent insurances, and there’s the possibility for fines if rules and regulations aren’t met.

The additional income from tenants could be subject to income tax but you may be able to offset some or all of this against some of the costs of letting out your property. You’ll also have more demands on your time especially if you don’t use a letting agent as properties don’t look after themselves. Find a letting agent here.

Find out more in the Money Advice Service’s buy-to-let property guide.

All information accurate at time of publication.

This article is provided by the Money Advice Service.

Money Advice Service

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