Aside from your home, it’s likely that your pension will be your most valuable asset, and choosing when to cash it in is an important part of the retirement planning process. Once you’ve decided whether flexi-access drawdown or an annuity is best suited to your needs you can crystallise your pension and begin drawing an income from it.
Crystallising your pension
A crystallised pension is the opposite of an uncrystallised pension, which is the name for a pension that hasn’t been cashed in via drawdown or an annuity. Crystallising your pension is the process of freeing up your investments and obtaining access to your pension savings. Crystallised pensions sit outside your estate for tax purposes, and while your funds are readily available, you won’t have to pay any tax on your crystallised pension until you start taking money from it.
The first thing you can do with a crystallised pension is withdraw up to 25% of it as a tax-free lump sum. This can also be known as a pension commencement lump sum (PCLS), and is one of the main benefits of crystallising a pension. The remaining 75% of your pension is subject to income tax at the point of withdrawal of 20% for basic rate taxpayers, 40% for higher rate and 45% for additional rate taxpayers.
Once you’ve crystallised your pension and taken your tax-free lump sum, you can choose between drawdown and purchasing an annuity. Drawdown allows you to keep your funds invested but, at the same time, gives you access to your money as and when you need it. An annuity can be purchased to secure a fixed retirement income for an agreed period, or for the rest of your life, depending on the type you buy. It’s worth noting that you can choose drawdown before going on to purchase an annuity, however once you buy an annuity you’ll be locked in.
Crystallised pension rules
To crystallise your pension you must be aged 55 or older, or meet strict conditions for accessing your pension early. You can choose to crystallise your defined contribution or personal pension anytime from the age of 55.
A crystallised funds pension lump sum is a popular way of accessing your funds, however you can also take an uncrystallised funds pension lump sum (UFPLS), if you don’t intend to buy an annuity or enter into a drawdown scheme. If you choose this method then every payment you take will be 25% tax-free with income tax charged on the remaining 75%.
Please note that the age to access your pension will increase from 55 to 57 in 2028.
Drawdown and annuities
Drawdown is simple with PensionBee. Our service combines all of your old pensions into one easy to manage online plan. Funds are managed by some of the biggest global investment firms such as BlackRock, State Street Global Advisors, HSBC and Legal & General.
You may also consider purchasing an annuity, a financial product designed to pay you a regular income using your pension savings. PensionBee’s partnered with Legal & General to offer a pension annuity to anyone who would prefer a different option to our drawdown service.
Alternatively, you could also combine an annuity with drawdown. This means using part of your pension to purchase an annuity, giving you a guaranteed regular income, alongside the flexibility of drawdown to make ad-hoc withdrawals as you leave the rest of your pension pot invested with the potential for it to grow in value over time.
You’ll be able to track how your funds are performing through an online dashboard and once you reach 55 you can access your money in just a few simple steps. As long as there are no issues verifying your bank details, it will take around 10 working days for you to receive your money.
Risk warning
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
Last edited: 06-04-2024
