A ‘crystallised’ pension is a pension that you’ve started taking retirement benefits from. You can do this from the age of 55 (or age 57 from 2028) by withdrawing a lump sum, or via drawdown or an annuity.

Crystallising a pension

Crystallising your pension unlocks your investments and gives you access to your pension savings. Your pension is likely to be one of your most valuable assets, second perhaps only to your home. Deciding when and how to cash it in is a significant decision in your retirement planning and should be taken under advice from a financial adviser.

Once you’ve decided how to access your pension income, either as pension drawdown or in the form of an annuity, you can then crystallise your pension and begin to draw an income from it.

A crystallised pension is different from an uncrystallised pension, which is still in its original state and hasn’t been accessed via drawdown or an annuity.

A crystallised pension allows you to withdraw up to 25% as a tax-free lump sum

Benefits and tax implications of a Crystallised Pension

One of the main advantages of a crystallised pension is that you can withdraw up to 25% as a tax-free lump sum, also known as a pension commencement lump sum (PCLS).

The remaining 75% of your pension becomes subject to income tax at the point of withdrawal. This tax rate varies based on your tax bracket.

Your income options for a Crystallised Pension

After crystallising your pension and taking the tax-free lump sum, it’s common to either enter a drawdown arrangement, or buy an annuity.

Drawdown keeps your funds in an invested state but allows access to your money as needed. You can change the amount of income you take via drawdown, which can provide flexibility throughout retirement.

An annuity is a type of insurance product that you purchase in return for your funds. It provides a fixed retirement income for a predetermined period or life, depending on the type you choose.

You can combine the two options, buying an annuity with one portion of your pot, and leaving the rest in drawdown. But it’s important to note that while you can opt for drawdown initially and then move to an annuity, buying an annuity cannot be undone.

What about UFPLS (Uncrystallised Funds Pension Lump Sum)?

When taking your lump sum, you can opt for a crystallised funds pension lump sum or an uncrystallised funds pension lump sum (UFPLS). With UFPLS, each payment you take is 25% tax-free, with the remaining 75% being taxed.

Some people to take UFPLS because they don’t plan to buy an annuity or enter a drawdown scheme – often because the pension pot is small. However, there are significant disadvantages to this approach. Read our article about UFPLS and flexible pension drawdown to learn more.

To crystallise your pension, you must be 55 or older

At what age can you crystallise your pension?

To crystallise your pension, you must be 55 or older, or meet specific conditions for early access. It’s important to remember that the age for accessing your pension will increase from 55 to 57 in 2028.

Making the right decision for your retirement

Understanding the intricacies of a crystallised pension is a key aspect of effective retirement planning. Whether you choose drawdown, an annuity, or a combination of both, your financial adviser will ensure you understand how your pension will work once crystallised.

Get in touch

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