Overview: Your Pension and Retirement Choices
Published / Last Updated on 09/03/2026
As you approach your 50s and 60s, key questions naturally arise about retirement. Understanding the type of pension you hold is the foundation for making informed decisions about income, tax, and timing.
Common questions include:
- What happens when I retire?
- When can I take my pension?
- How much will I receive?
- What options do I have?
- What paperwork is needed?
- How will tax work?
The Two Main Types of Pension Schemes
UK pensions fall into two broad categories. Each works differently and offers different retirement options.
Defined Benefit (DB) Pension Schemes
DB pensions provide a guaranteed income for life based on your salary and years of service.
Who typically has a DB scheme
- Central and local government employees
- NHS, teachers, armed forces, emergency services
- Some large private employers (banks, insurers)
Key features
- Income for life, often with a spouse’s pension on death
- Option to exchange part of the income for a tax‑free lump sum (UK rules)
- Pension amount based on a formula (e.g., 1/60ths of salary per year of service)
- Increases (indexation) usually apply before and after retirement
- Early retirement normally allowed from age 55 (57 from April 2028)
- Early retirement reductions may apply
- Ill‑health retirement may be available
- Some schemes limit how long you can defer taking benefits
- Payments usually stop on second death
Example calculation
A 1/60ths scheme with 30 years of service:
30 ÷ 60 = 50% of pensionable salary paid as annual income.
Defined Contribution (DC) Pension Schemes
DC pensions build up a pot of money invested over time. Your retirement income depends on the fund value and how you choose to use it.
Where DC schemes are found
- Workplace pensions
- Group personal pensions
- Company money purchase schemes
- AVCs
- Personal pensions and SIPPs
Key features
- Your pot is invested and can rise or fall
- No built‑in guarantees
- Up to 25% can usually be taken tax‑free (UK rules)
- The remaining 75% is taxable and can be used to:
- Buy an annuity (secure income)
- Move into flexible drawdown (take income as needed)
- Early retirement usually allowed from age 55 (57 from April 2028)
- No penalties for early access (the pot is simply worth what it is worth)
- You can normally defer taking benefits indefinitely, though some schemes restrict this after age 75
- On death:
- Annuity income continues only if you selected spouse benefits
- Drawdown funds can pass to beneficiaries (IHT‑free for spouses; potential IHT for others from April 2027)
Retirement Options for DC Pensions
Annuity (secure income)
- Guaranteed income for life
- Options include spouse’s pension, inflation increases, and guarantee periods
- Income is taxable
Flexible drawdown
- Pension remains invested
- Withdraw as much or as little as you want
- Income is taxable
- Fund can be inherited
Retirement Paperwork and Process
Defined Benefit schemes
- You receive a retirement pack before your scheme’s retirement age
- Options usually include:
- Full income, no lump sum
- Reduced income with standard lump sum
- Lowest income with maximum lump sum
- You return your chosen option with ID and proof of age
Defined Contribution schemes
- Providers send retirement options for annuity and/or drawdown
- You are encouraged to shop around or seek advice
- Transfers may be required if choosing a new annuity provider or drawdown plan
How HMRC Taxes Your Pension
Think of your pension provider as a new employer. HMRC issues a tax code, and tax is deducted from income payments.
Key points
- Tax‑free lump sums are paid without HMRC involvement
- Regular pension income is taxable
- HMRC issues a tax code for:
- DB pension income
- Annuity income
- Regular drawdown payments
- Ad‑hoc drawdown withdrawals are taxed using an emergency code
- Overpaid tax can be reclaimed from HMRC
Get more retirement choices help from us:
- Options At Retirement - Dedicated Video/Articles Channel
- Financial Calculators
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FAQs:
When can I take my pension?
Most pensions allow access from age 55, rising to 57 from April 2028.
What is the difference between DB and DC pensions?
DB pensions pay a guaranteed income.
DC pensions provide a pot of money you choose how to use.
Can I take a tax‑free lump sum?
Yes. Most pensions allow up to 25% tax‑free (UK rules).
Do I have to buy an annuity?
No. DC pensions can be used for flexible drawdown instead.
Will I pay tax on my pension?
Regular pension income is taxable. Lump sums are usually tax‑free.
What happens if I take money from drawdown as a one‑off?
An emergency tax code is applied, and you may need to reclaim overpaid tax.
What happens to my pension when I die?
DB pensions may pay a spouse’s pension.
DC pensions can be inherited, often tax‑free for spouses.
Can I delay taking my pension?
DB schemes may allow limited deferral.
DC schemes usually allow indefinite postponement (subject to provider rules).
