In 2015, the former Chancellor, George Osborne, announced reforms that significantly altered how you could access your retirement wealth.
These changes, known as “Pension Freedoms”, were designed to offer more flexibility and control over your pension fund.
As Osborne declared at the time, “Pensioners will have complete freedom to draw down as much, or as little, of their pension pot as they want, anytime they want”, the Government website states.
Now, in 2025, it has been a decade since the reforms were introduced. Yet, despite their significance, many people in the U.K. seemingly don’t fully understand the choices available to them.
Indeed, research from PensionsAge shows that only 20% of survey respondents were aware of Pension Freedoms.
With this in mind, continue reading to discover exactly what the Pension Freedoms legislation entails, and how it might affect your retirement income strategy.
Pension Freedoms give you more control over how you access your retirement fund
Prior to the introduction of Pension Freedoms in 2015, capped drawdown legislation was in place (first introduced in 1995).
This allowed you to take a 25% tax-free withdrawal from your retirement fund, as is still the case today. You could then choose to use the remainder to purchase an annuity, which is essentially a form of insurance product that pays a guaranteed income in exchange for your pension, or invest in a capped drawdown pension arrangement, which limits the amount you could withdraw from the remaining balance.
This was based on Government guidelines known as the GAD rate and meant to ensure you didn’t run out of money in your lifetime.
While annuities could – and still do today – offer stability, they don’t always provide the flexibility you might require.
For instance, if you were to pass away before the total income you received from your annuity exceeded the value of your pot, some of the savings you worked hard to accumulate might not fully benefit you and your loved ones.
Pension Freedoms changed this by introducing more choice once you reach the normal minimum pension age of 55 (rising to 57 in 2028).
You can still access the first 25% of your pension without incurring a tax bill. But now, you can withdraw as much, or as little, as you want, whenever you want.
This is called “flexi-access drawdown”, and it allows you to take income when you need it while keeping the rest of your pension invested, giving it the potential to grow further.
While this is advantageous, it’s important to note that any wealth you draw beyond the first 25% is typically subject to tax.
You should always remember that the amount you can take without facing tax is capped by the Lump Sum Allowance (LSA). This limits the total tax-free cash you can draw from your pensions during your lifetime, and as of 2025/26, it stands at £268,275.
Your LSA may be higher if you previously applied for Lifetime Allowance (LTA) protection. Or, in certain situations – such as taking a lump sum due to a serious illness, or your beneficiaries are paid certain lump sum death benefits – you could draw as much as £1,073,100.
Still, having your pension partly invested even after you start drawing from it means it can continue to grow, ultimately supporting your dream lifestyle over time.
It might be wise to delay accessing your tax-free lump sum
As soon as you reach the minimum retirement age, you might want to withdraw your entire 25% tax-free lump sum.
You wouldn’t be alone with this, with Royal London revealing that 55% of those eligible for the tax-free lump sum chose to take the maximum amount.
However, it’s vital to remember that you don’t necessarily have to take the whole 25% at once. In fact, spacing withdrawals out over several years might prove more tax-efficient.
You might even consider delaying access to your pension entirely and relying on other sources of wealth instead.
By drawing some, or all, of your tax-free lump sum, you’re effectively reducing the growth potential of your overall pot.
Fidelity states that if your pension was worth £80,000, the first £20,000 wouldn’t be subject to tax. So, on reaching the normal minimum pension age, you could take this sum tax-free.
But, if you left this invested, and it continued to grow at 5% each year, your pension could be worth £124,000 after 10 years.
If you then took your lump sum 10 years later, it would be worth £31,000 – an extra £11,000.
Moreover, using up other sources of wealth, such as that from your ISAs, could mean you don’t trigger the Money Purchase Annual Allowance.
As of 2025/26, the Annual Allowance allows you to contribute £60,000 to your pension (or 100% of your earnings, whichever is lower) while still benefiting from tax relief. This includes third-party contributions as well as tax relief.
However, if you start drawing from the tax-assessable element of your pension and intend to continue contributing for future growth, the MPAA limits your tax-efficient contributions to £10,000 a year.
This significantly reduces the amount of wealth you can save tax-efficiently. As such, it might be prudent to consider whether you want to draw from your pension flexibly, especially if you plan to continue working in some capacity after you turn 55 or even during retirement.
Professional advice could help you devise a bespoke retirement income strategy
As you can see, Pension Freedoms has created more choices than ever when it comes to your retirement income strategy.
While the flexibility and control are undoubtedly positive, they can also complicate decision-making.
The aforementioned Royal London research states that 42% of those aged 50 or over were worried about running out of money in the next phase of their lives.
Despite the complexity of choices surrounding Pension Freedoms, only 39% of respondents with a defined contribution (DC) or personal pension sought advice from a financial planner before taking a lump sum.
Working with a financial planner could allow you to make decisions regarding your retirement income strategy confidently.
Indeed, we can offer advice that is tailored to your unique situation. For instance, you may decide to use part of your tax-free lump sum to clear debts, while leaving the rest invested for future growth.
Alternatively, you may find that securing a guaranteed income through an annuity offers some much-needed peace of mind.
Ultimately, we could ensure you make the most of the flexibility on offer, while maintaining the confidence that your income strategy is sustainable for the years ahead.
To learn more about how we can support you, please use our search function to find your nearest Verso office. Or, for Verso Investment Management enquiries, please contact us at info@versoim.com or call 020 7380 3300.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation, and regulation, which are subject to change in the future.
The Financial Conduct Authority does not regulate tax planning.