You've taken your tax-free cash: now what?

09 July 2025

Written by Retirement Line

If you choose to take your maximum 25% tax-free lump sum from your pension savings, what are your options for the rest of the money? We look at your potential options.

Although some people will be able to take more or less, from age 55 (rising to 57 from April 2028) you can typically take up to 25% of the money saved in your defined contribution pension as a tax-free lump sum.

You can read about how this works in our extensive guide: Taking a pension tax-free cash lump sum.

You can take your tax-free allowance in stages rather than all in one go. But assuming you decide to take it as a single lump sum, what can you do with the rest of your money? Thankfully, you have considerable choice and flexibility. 

Options for accessing or investing the rest of your pension pot

If you are happy to leave your remaining pension fund invested, you can move it to an income drawdown provider. Your pension fund will then rise or fall depending on market performance. 

You can access your money by making withdrawals as and when you wish. How much you can take over your retirement will depend on the size of your fund now, and how well your investment performs in the future. 

But what if you want the reassurance of guaranteed income, unaffected by stock market ups and downs? In that case, you have two main options:

A lifetime annuity. This is the only option that secures regular, guaranteed income for the rest of your life, with no investment risk. It brings you financial peace of mind no matter how long you live, regardless of what happens to stock markets and interest rates. You may qualify for extra income if you have certain health issues or have made certain lifestyle choices. Read more about lifetime annuities.

A fixed term annuity. This secures a guaranteed return on your pension fund - without investment risk. At the end of a term of your choice (typically 1-20 years), you’ll receive a guaranteed lump sum that you can use to set up another annuity for regular income, invest, or take as taxable cash. You can also take a regular income from your fund during the term if you wish. Read more about fixed term annuities and see our article Using a fixed-term annuity to bridge an income gap for more information.

Can I mix-and-match my options?

You don’t have to choose just one of these options. You may decide that a ‘blended’ approach is best, where you take a combination of retirement income solutions.

For example, you may decide to move your money into drawdown for a few years and then set up an annuity later on. Or you might want to use some of your pension pot to buy an annuity for guaranteed income to meet your regular expenses, and leave some invested in drawdown to access when you need it.

You should of course think carefully about your options to decide what’s right for you. Consider seeking professional financial advice or guidance to help you understand your options.

What about income tax?

With all these options, assuming you have taken your full 25% tax-free cash allowance, any further income from your pension will be taxable at your marginal rate. For the tax year 2025-26:

• If your income in a tax year is less than £12,570 (your personal allowance), you won’t pay any income tax. 

• If your income is between £12,571 and £50,270, you would pay the basic rate of 20% on your earnings above £12,570. 

• If your income is between £50,271 and £150,000, you would pay 40% in tax. However, your personal allowance reduces by £1 for every £2 earned over £100,000 until it’s zero once you earn over £125,140.

• If your income is over £125,140, you would pay 45% in tax.

See the useful guides to tax rates at Gov.uk and Money Saving Expert for more information about how income is taxed. The rates above are for England, Wales and Northern Ireland only. Income tax rates in Scotland are different. 

Explore your options

As explained above, once you have taken your tax-free cash, there are a number of ways you can access or invest the rest of your pension pot. 

Our Annuity Specialists will be happy to discuss your lifetime and fixed term annuity options. They can also prepare personalised quotes from leading annuity providers at today’s best annuity rates. These will show examples of the income or future lump sum you can lock-in with your fund.

Call our team on freephone 0800 652 1316 or request a call back. Alternatively, use our free online tools for an instant estimate of how much annuity income you might expect to secure.