Taking money from your pension - what you need to know

Typically used for: Withdrawing small pension balances in one go.

If you have one or more small pension pots, you may be able to take them as a one-off lump sum under the 'small pots' rule. This option is designed for people with smaller pension values who want a simple way to access money without setting up drawdown or buying an annuity.

For personal pensions, you can usually take up to three pension pots worth £10,000 or less each, and these can be with different providers. For workplace pensions, you can typically take an unlimited number of small pots, subject to the scheme's rules.

When you take a small pot:

• 25% is tax-free

• 75% is taxed as income in the year you take it

• Payments are usually made as a single payment, and once taken, the pot is closed.

This option is often used to tidy up small pension balances, but taking money from your pension means less remains invested for retirement and may affect how much tax you pay in that year.

Typically used for: Accessing part of your pension as cash when you first start taking benefits.

You can usually take up to 25% of your pension as a tax-free lump sum, up to a maximum of £268,275 (this is known as your lump-sum allowance). If you have a protected allowance, you may be able to take more tax-free. Tax treatment depends on your individual circumstances and may be subject to change.

A lump sum is typically taken when you first access your pension. You do not have to decide how to take the rest of your pension savings at the same time, but taking a lump sum often marks the start of accessing benefits from that pension pot.

Lump sums can be taken in different ways. For example, you may be able to take an Uncrystallised Funds Pension Lump Sum (UFPLS) or take a tax-free lump sum when setting up a flexi-access drawdown. Any amount above the tax-free portion is taxed as income.

This option may suit you if you need a larger amount of money upfront, for example to pay off a mortgage or cover a significant expense. However, taking money from your pension means less remains invested, which could reduce the income available to you later in retirement.

Typically used for: Keeping your pension invested while taking flexible income.

Flexi-access drawdown allows you to move some or all of your pension savings into a drawdown account and take income as and when you need it. You can usually take up to 25% of the amount you move into drawdown as a tax-free lump sum, with the remainder staying invested.

As your pension remains invested, its value can go up or down depending on investment performance. This means you could get back less than has been paid in. Your fund could also run out if you take too much income or if investment returns are lower than expected.

There is no requirement to take a regular income. You can take occasional withdrawals, set up regular payments, or choose not to take any income at all. Any withdrawals above the tax-free amount are taxed as income at your marginal rate in the tax year you receive them. Tax treatment depends on individual circumstances and may be subject to change.

This option offers flexibility over how and when you access your pension savings, but any income you take is not guaranteed. It may suit you if you want to keep your pension invested, are comfortable with investment risk, and want control over the timing and amount of your withdrawals.

Typically used for: Flexible, phased access over time

UFPLS allows you to take one‑off or occasional lump sums directly from your pension without committing to drawdown or buying an annuity. This can be useful if you want flexibility and don’t need a regular income yet.

Each UFPLS payment works like this:

• 25% of each withdrawal is tax‑free

• 75% is taxed as income

• The rest of your pension stays invested

You can take UFPLS payments as and when you need them, which may help you manage how much tax you pay by spreading withdrawals over multiple tax years.

UFPLS may be right for you if:

• You want some cash now but want to leave the majority invested

• You’re not ready to commit to a long‑term income solution

• You want flexibility and control over the timing of withdrawals

Typically used for: Certainty and a secure, regular income for life

An annuity converts some or all of your pension into a guaranteed income, usually paid for the rest of your life. You can typically take up to 25% of your pension as a tax‑free lump sum before buying an annuity, with the rest used to secure the income.

Once an annuity is set up, the income amount is fixed based on factors such as your age, health, and the type of annuity you choose. Options may include a level or increasing income, and benefits for a spouse or dependant after your death.

Annuity income is taxed as income under PAYE, and once purchased, annuities usually cannot be changed or cancelled. In return, you get the reassurance of knowing exactly how much you’ll receive.

This option may suit you if you value stability and want to cover essential living costs with a guaranteed income you cannot outlive. Scottish Friendly does not offer annuities.

Typically used for: Not needing income yet and wanting to keep options open

Deferring means leaving your pension invested and not taking any money from it yet. Because your pension remains invested, its value can go up or down depending on market performance, and you could get back less than you have paid in.

By delaying access, you keep all your retirement options open for the future, including taking a lump sum, setting up drawdown, or buying an annuity later. You also avoid triggering income tax or using your tax‑free allowance now.

There is no requirement to take your pension at a specific point (aside from age‑related rules), and deferring can be useful if you are still working or have other sources of income.

This option may suit you if you don’t currently need your pension income and are happy to leave it untouched until a later date. You should bear in mind tax treatment depends on individual circumstances and may be subject to change.

Can you still pay into your pension?

If you're still working or have spare income, some pension plans allow you to continue making contributions. Whilst plans like Section 32 (S32) policies typically don’t accept new payments, other types of pensions might, and contributing can still be a smart move.

Tax rules vary. Taking money from your pension may increase your taxable income and could affect how much tax you pay. While some withdrawals include a tax‑free element, any taxable portion will be added to your income for the year. The amount of tax‑free cash available, and how and when it can be taken, may also depend on the rules of your specific pension scheme.

Some ways of taking money from your pension can reduce how much you're allowed to contribute to pensions in future. This is known as the Money Purchase Annual Allowance (MPAA)..

For example, if you take taxable income from your pension through flexi-access drawdown or a UFPLS (Uncrystallised Funds Pension Lump Sum), the MPAA will normally apply. This will reduce the amount you can contribute to money purchase pensions in future without incurring a tax charge.

However, taking only your tax-free cash lump sum without drawing any taxable income does not normally trigger the MPAA. Taking small pension pots as lump sums does not usually trigger the MPAA either.

If you're planning to continue paying into a pension after accessing your savings, it's important to understand how your chosen retirement option could affect your future contribution limits.

Some options provide flexibility, allowing you to take money as and when you need it, while others provide certainty through a guaranteed income for life or a fixed period. It’s important to consider whether flexibility or predictability better suits your circumstances.

Options that leave your pension invested may allow the value to grow, but they also carry investment risk and your income is not guaranteed. Other options provide guaranteed income but may limit access to your capital. Think about your expected income needs over time and whether you may need access to lump sums later.

Your age, health, other sources of income, and future plans can all affect which option is most suitable. What works well for one person may not be right for another.