Choosing how to take your DC pension pot
You can use your DC pension pot in the way that best suits your own retirement plans. For example, if you want to pay off a mortgage you might want cash or you may prefer a regular income. You have the following options for taking your DC pension pot:
You can currently take up to 25% (up to the Lifetime Allowance (LTA)) of your DC pension pot tax-free. You could use what’s left over to buy an income in the form of an annuity, ‘cash out’ or have a drawdown income.
You can use some, or all of your DC pension pot to buy an income (called an annuity) with a provider of your choice. If you want to, you can take up to 25% of your DC pension pot (up to the Lifetime Allowance) as tax-free cash and then use the rest towards securing an income. The income you’ll get from your annuity depends on a number of things, including:
- The value of your DC pension pot
- Annuity rates at the time you’re buying the income
- The type of annuity you choose – for example, you might want to include a pension for a spouse or civil partner in case they outlive you
- Whether you buy an annuity that increases or remains level
- Your health – if you’re in poor health you might be able to get a higher income (this is known as an impaired life annuity)
- Whether you wish your annuity to payments to continue to be paid to a dependant if you die during a specified period of time after the annuity starts (known as a guarantee period)
You can take all your DC pension pot in one go – this is sometimes known as an Uncrystallised Funds Pension Lump Sum (UFPLS). This option gives you the opportunity to take 25% – up to the Lifetime Allowance (LTA) – tax-free and the rest is then taxed at your marginal income tax rate* (taking benefits this way may affect any ‘means-tested’ benefits you might be entitled to). If you choose to take this directly from the Scheme then it will need to be taken in one payment. If you would like to take multiple payments (or multiple UFPLS) then you will need to first transfer your DC pot to another provider that offers this type of arrangement. If you are entitled to a higher tax-free cash lump sum this cannot be taken as an UFPLS.
*HSBC’s Administration Team won’t have your tax code so you’ll pay tax at the emergency rate (i.e. without any personal allowances) on the cash amount over the tax-free limit. You’ll need to reclaim any overpaid tax yourself. You can find more information about this here or you can contact your HMRC office.
This is also called "flexi-access drawdown". First you'll need to transfer your DC pension pot out of the Scheme to a provider offering a drawdown facility. Then you can take up to 25% of your DC pension pot (up to the Lifetime Allowance) as tax-free cash and invest the rest in one or more funds. These let you take income when you like, for example, monthly or on an irregular basis. You'll pay tax on this income at your marginal income tax rate.
Alternatively, you can transfer your DC pension pot and "drawdown" a series of cash lump sum payments, taking 25% of each payment (up to the Lifetime Allowance) tax-free with the rest of the payment being taxed at your marginal income tax rate.
‘Cash out’ and ‘drawdown’ DO NOT give you a guaranteed, regular income.
Money Purchase Annual Allowance
Taking all your DC pension pot (or any other money purchase savings you have) as cash, opting for flexible drawdown or taking reducing annuities when you’re over the age of 55 will trigger the Money Purchase Annual Allowance for any future DC contributions.
You can find out more about the Money Purchase Annual Allowance and other limits on tax relief at the Money Advice Service.