Three ways to take money from a DC pension
In brief: From age 55 (rising to 57 from April 2028), you can take money from a defined contribution pension. There are three main routes: flexi-access drawdown (FAD), uncrystallised funds pension lump sums (UFPLS), and buying an annuity. Each route has different tax treatment and flexibility.
Most people with a SIPP or workplace pension will use one or more of these routes. They are not mutually exclusive — you can use different methods at different times, or even from the same pension.
Route 1: Flexi-Access Drawdown (FAD)
Flexi-access drawdown works in two stages.
Stage 1: Crystallise
You designate some or all of your pension for drawdown. This is called crystallisation. When you crystallise:
- 25% becomes tax-free cash — formally called the Pension Commencement Lump Sum (PCLS). This is paid to you or held in your account, tax-free.
- 75% moves into a drawdown pot — this money stays invested in your chosen funds.
The tax-free cash is subject to the Lump Sum Allowance (LSA), currently £268,275 across your lifetime.
Crystallisation is irreversible. Once funds are crystallised, they cannot return to uncrystallised status.
Stage 2: Draw income
From the drawdown pot, you can withdraw any amount at any time. Every withdrawal from the drawdown pot is 100% taxable as income — the tax-free element was already separated at crystallisation.
There are no minimum or maximum withdrawal limits. You can take a regular monthly income, occasional lump sums, or nothing at all in years when you don't need it.
The drawdown pot remains invested. Its value fluctuates with markets — it can grow or shrink. There is no guaranteed income.
Partial crystallisation
You don't have to crystallise everything at once. Many people crystallise in tranches — for example, £100,000 each year — taking £25,000 tax-free cash from each tranche and moving £75,000 into drawdown. This spreads the tax-free cash across multiple tax years.
A pension can contain both crystallised and uncrystallised portions at the same time.
Route 2: UFPLS (Uncrystallised Funds Pension Lump Sum)
UFPLS lets you take lump sums directly from your uncrystallised pension. There is no crystallisation step — the money comes straight out of your existing pension pot.
Each UFPLS withdrawal follows a 25/75 split:
- 25% is tax-free
- 75% is taxable as income in the year you receive it
The tax-free portion still counts against the Lump Sum Allowance.
UFPLS is typically used for ad-hoc lump sums rather than regular income. The key difference from drawdown: there is no separate "drawdown pot" and no upfront crystallisation. Each withdrawal is a self-contained event.
Route 3: Buy an annuity
An annuity converts a lump sum into guaranteed income for life. You hand over part or all of your pension pot to an insurance company, and they pay you a fixed income until you die.
Annuities provide certainty — you know exactly how much you'll receive. But the trade-off is that you give up access to the capital, and the income amount depends on annuity rates at the time of purchase.
For a full explanation, see How Annuities Work.
What FAD and UFPLS have in common
Both routes share several important features:
Money Purchase Annual Allowance (MPAA). Taking taxable income from either FAD or UFPLS triggers the MPAA. This permanently reduces the annual limit for future pension contributions from £60,000 to £10,000. The MPAA is triggered the first time you take taxable income — not by crystallising alone, and not by taking only tax-free cash.
Lump Sum Allowance. Both routes use up the LSA on their tax-free portions. Whether you take PCLS through crystallisation or the 25% tax-free element of a UFPLS, it all counts against the same £268,275 lifetime cap.
Death benefits. Remaining funds in either a drawdown pot or an uncrystallised pension can be passed to nominated beneficiaries. If you die before age 75, beneficiaries receive the funds free of income tax. At or after 75, beneficiaries pay income tax at their marginal rate on withdrawals.
From 6 April 2027, unused pension funds will also be included in your estate for Inheritance Tax (IHT) purposes. This is a significant change — previously, pensions sat entirely outside the estate. After April 2027, pension death benefits may attract IHT at 40% on the portion of the total estate above the nil-rate band (currently £325,000). Funds passing to a surviving spouse or civil partner remain exempt from IHT. Where both income tax and IHT apply, income tax is not charged on the amount equal to the IHT due, to avoid full double taxation. Death-in-service benefits from registered pension schemes are excluded from these changes.
Investment growth. In both cases, the remaining pension stays invested and continues to grow (or fall) with markets until you withdraw it.
How the routes work in practice
FAD supports withdrawals of any amount at any time from the drawdown pot. The timing and amount of taxable income are determined by when you choose to draw.
UFPLS is a lump-sum mechanism — each withdrawal is a self-contained event without a separate drawdown arrangement.
The same pension can use both methods at different times — for example, crystallising a portion while leaving the remainder uncrystallised for UFPLS withdrawals.
These projections are for modelling purposes only. They do not constitute financial advice. Tax rules are subject to change. Please consult a qualified financial adviser before making financial decisions.