Pension Freedoms Explained: How to Access Your SIPP at Retirement

The pension freedoms introduced in April 2015 completely changed how you can access your pension. Before 2015, most people were essentially forced to buy an annuity - a fixed income for life. Now you have much more flexibility, and understanding your options is crucial.

When Can You Access Your Pension?

Currently, you can access your pension from age 55. From April 2028, this will rise to 57. There's no requirement to stop working - you can access your pension while still employed if you wish.

There's also no requirement to take your pension at any particular age. You can leave it invested indefinitely, which can be useful for tax planning and passing wealth to the next generation. However, from April 2027, unused pension pots will be included in your estate for inheritance tax purposes, which changes the calculation for many people.

The 25% Tax-Free Lump Sum

When you access your pension, you can take up to 25% of your pot as a tax-free lump sum. This is known as the Pension Commencement Lump Sum (PCLS). For most people, this is capped at £268,275 (25% of the old lifetime allowance of £1,073,100).

You don't have to take the full 25% at once. You can take it in stages through a process called "uncrystallised funds pension lump sum" (UFPLS), where each withdrawal is 25% tax-free and 75% taxed as income.

Many people take their tax-free lump sum to pay off a mortgage, renovate their home, or provide a financial cushion at the start of retirement.

Flexi-Access Drawdown

The most popular option under pension freedoms is flexi-access drawdown. This keeps your pension invested while you take income from it as and when you need it. You choose how much to withdraw and when.

The advantage is flexibility - you can take more in some months and less in others. The disadvantage is that your pension can run out if you withdraw too much or if investment returns are poor. There's no guarantee, unlike an annuity.

A commonly cited rule of thumb is the "4% rule" - withdrawing about 4% of your pot per year gives a good chance of your money lasting 30 or more years. But this isn't a guarantee, and it depends on investment returns and inflation. Our guide to pension drawdown covers this in more detail.

Annuities

An annuity gives you a guaranteed income for life in exchange for all or part of your pension pot. Rates have improved significantly since interest rates rose in 2022-2023, making them more attractive than they were for many years.

The advantage is certainty - you know exactly how much you'll receive each month for the rest of your life, no matter how long you live. The disadvantage is that once you buy an annuity, the money is gone. You can't change your mind, and if you die shortly after buying one, your beneficiaries may receive little or nothing (unless you chose a guarantee period or spouse's pension).

Tax on Pension Withdrawals

This is the part that catches many people out. While 25% of your pension is tax-free, the remaining 75% is taxed as income when you withdraw it. If you take too much in a single tax year, you could push yourself into a higher tax bracket.

For example, if you take £40,000 from your pension in a year when you also have £20,000 of other income, your total income is £60,000 and some of it will be taxed at the higher rate of 40%.

Smart withdrawal planning can save you thousands in tax. Taking smaller amounts over several years to stay within the basic rate band is often more tax-efficient than taking large lump sums.

What Should You Do?

Use our SIPP calculator to project what your pension could be worth at retirement, including the tax-free lump sum and estimated annual drawdown income. If your situation is complex, speaking to a financial adviser about your withdrawal strategy is money well spent.