What is a crystallised pension?

A crystallised pension is one that has been cashed in via drawdown or an annuity. As I’m sure you know, the money in your pension is invested in the stock market. This is how your pension grows to leave you with more money for retirement. Crystallising your pension is the process of selling your investments to withdraw your pension savings.

What is pension drawdown?

From the age of 55, in most cases, you can begin to withdraw your pension, and one of the options available to you is pension drawdown. Drawdown is a way of taking money from your pension, either as a regular income or as one-off payments as and when you need them. Unlike an annuity, pension drawdown keeps your savings invested and allows you to retain ownership of your funds. However, with pension drawdown, your income is not guaranteed.

What is an annuity?

Another option you have is to buy an annuity. This is where you sell your pension scheme to an insurance company and in return, they promise to pay you a guaranteed income each year for the rest of your life. This can be a very secure pension option. However, buying an annuity means that you no longer own your pension pot.

You don’t have to use your whole pension pot to buy an annuity. If you would like to still have access to some pension money to take as and when you need it, you could leave part of your pension where it is and use the rest to buy an annuity.

What is the difference between a crystallised and an uncrystallised pension?

An uncrystallised pension is one that hasn’t been cashed in via drawdown or annuity. Crystallising your pension is the process of freeing up your investments and withdrawing your savings.

When it comes to tax, crystallised pensions are not included in your estate, and you do not pay tax on your pensions until you start taking money from it. Any money you withdraw from your pension is subject to income tax at your marginal rate.

Tax treatment depends on your individual circumstances and may be subject to change.

How can I withdraw my crystallised pension?

When you start to withdraw your pension, the first 25% can be taken tax-free. This means it isn’t classed as income and therefore doesn’t count towards your annual tax allowance. From here you can:

  • Take further lump sums as and when you need to
  • Take an income
  • Withdraw your whole pension

When thinking of withdrawing your pension, it’s a good idea to first speak with a financial adviser. This is because releasing pension money early will leave you worse off in retirement. A financial adviser can talk you through what options are best for you and your needs and help you avoid the common mistakes when withdrawing money from your pension.

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