If you’re already overseas or planning your retirement abroad, sorting your UK pensions is one of the most important (and confusing) things you’ll ever do. And if you get it wrong? You could end up paying thousands in tax, missing out on growth, or locking into something that’s a dud for life.
- 1. Understand the Types of UK Pensions First
- 2. Guidance vs Advice: Know the Difference
- 3. The 25% Tax-Free Lump Sum
- 4. Drawdown or Annuity?
- 5. Access Age and Allowances
- 6. Avoiding the Tax Traps
- 7. Paying Off Debt with Pension Cash
- 8. Consolidating Multiple Pots
- 9. Bigger Pot? Get Professional Help
- 10. Final Checklist
- In Summary
So here’s our guide to taking money out of your pension pot the smart way—whether you’re overseas already or planning to be.
1. Understand the Types of UK Pensions First
There are three main types of pension in the UK. Each works differently, and that impacts how you can withdraw or transfer the money:
Defined Contribution (Money Purchase) Pensions
This is the most common type, including workplace pensions (where you and your employer both pay in), personal pensions, and SIPPs (self-invested personal pensions). With these, your money is invested to build a pot, which you can start accessing from age 55 (rising to 57 in 2028).
You have control over how this pot is used: take a 25% tax-free lump sum, use drawdown, or buy an annuity. You can also consolidate these pots, but always check for fees or benefits you might lose in the process.
Defined Benefit (Salary) Pensions
These give you a guaranteed income for life, based on your salary and years of service. They’re gold-plated and hard to beat. While transferring out is possible, you usually lose a lot of valuable guarantees. Think twice before moving these.
The UK State Pension
Not the focus here, but know this: it pays a flat weekly amount from age 66+, based on your National Insurance record. Read more here.
2. Guidance vs Advice: Know the Difference
Here’s the reality: the financial world is full of jargon and confusion. So start by knowing who you’re talking to.
Free guidance (like Pension Wise) helps you understand your options but doesn’t tell you what to do. Paid advice, from an FCA-regulated adviser, is tailored to your personal circumstances.
If your pot is small and your finances simple, guidance might be enough. But if you’re juggling multiple pensions or living overseas, get a proper advisor. It could save you far more than it costs.
3. The 25% Tax-Free Lump Sum
Everyone loves a freebie, and this is as close as it gets: 25% of your defined contribution pension pot can be taken tax-free. But how and when you take it matters.
Some use it to pay off debt. Others leave it untouched to keep growing. The longer it stays invested, the more it could be worth. You can take it all at once or in chunks, depending on your strategy.
Think of it like this: your pension is a Swiss roll. The jam is your tax-free bit. Take out the jam, and leave the sponge (the taxable part) for later.
4. Drawdown or Annuity?
There are two main ways to take money from your pot:
- Drawdown gives you flexibility. Your money stays invested, and you can dip in as needed. But it comes with risk – markets can fall, and you could outlive your pot.
- Annuities give you certainty. Hand over a lump sum, and you’ll get a guaranteed income for life. Good for peace of mind, but you lose access to your capital.
Annuities were rubbish for years, but rates have improved. Still, shop around. Never accept your pension provider’s first offer. If you’ve health issues, ask about an enhanced annuity – it could pay more.
5. Access Age and Allowances
Just because you can access your pension from 55 (soon 57), doesn’t mean you should. Timing matters.
If you’re still earning, drawing income now could be wasteful. You also risk triggering the Money Purchase Annual Allowance, which slashes how much you can contribute each year from £60,000 to £10,000.
So if you want to keep growing your pot, avoid taking taxable income. Stick to the tax-free 25% if needed, and leave the rest until your income drops.
6. Avoiding the Tax Traps
Many fall into avoidable tax traps when accessing their pensions. Here are a few:
Emergency tax codes can see you overtaxed on a lump sum. HMRC assumes you’ll earn that amount monthly for the rest of the year. You can claim it back, but it takes time.
Bad timing can push you into a higher tax bracket. If you’re earning a lot this year, consider waiting to draw taxable income until next year.
Cashing in old workplace pensions can mean losing valuable guarantees or protected benefits. Always check before making moves.
7. Paying Off Debt with Pension Cash
Let’s say you’re 55, with a decent-sized pension pot and a mortgage charging 7% interest. That’s expensive debt. Using your 25% tax-free cash to pay it off could save you more than you’d make from investing the money.
Take only what you need to clear the debt, and leave the rest growing. No need to touch all your pots either – choose the one with the best access or lowest fees.
8. Consolidating Multiple Pots
Got pensions from different jobs? Combining them can save money and hassle. But before you consolidate:
- Check for exit fees.
- Make sure you’re not losing any guarantees.
- Confirm the new provider allows access while living abroad.
It’s not always the right move, especially with older schemes that have hidden perks. If you’re unsure, get advice.
9. Bigger Pot? Get Professional Help
Managing a large pension pot abroad is a minefield. Don’t go it alone.
Find an FCA-regulated adviser with expat experience. They should charge clearly (flat fee or low %), explain your options in plain English, and steer clear of dodgy offshore schemes.
Avoid anyone cold-calling, promising guaranteed returns, or pushing high-fee products. If it sounds too good to be true, it is.
10. Final Checklist
To wrap it all up, here’s a quick list of steps:
- Know your pension type. Defined contribution? Defined benefit? State?
- Trace old pots. Use gov.uk’s Pension Tracing Service.
- Get guidance first. It’s free and helps frame your thinking.
- Time your withdrawals. Think tax, not just need.
- Consider advice. Especially if your pot’s over £50,000 or you’re living abroad.
In Summary
You worked hard for your pension. Now make it work for you.
Don’t rush. Don’t assume. Don’t let tax or dodgy advice cost you your retirement comfort.
Start with guidance, get professional help if needed, and take what you need, when it makes the most sense.
This is your retirement. Keep control of it.