How to spend your pension – navigating SIPP withdrawal rules

09 June 2025

When planning for retirement, investing in a Self-Invested Personal Pension (SIPP) can be one of the most beneficial decisions to help shape your financial future. These investment vehicles offer a tax-efficient way to grow your savings for retirement, providing you with greater control over where, when, and how much you invest.

Not only that, but SIPPs also offer flexibility over how you can access your funds when you choose to retire. Understanding SIPP withdrawal rules is a crucial component in your retirement planning process, allowing you to tailor your future goals and how much you want to save in your pension according to your planned method of withdrawing funds.

Whether you're approaching retirement or building wealth in the long term as a young investor, it is never too early to start considering how SIPP withdrawal rules may impact your finances.

Read on to explore the key aspects of navigating SIPP withdrawal rules, from learning when you can access your SIPP to tax implications and what happens to a SIPP when inherited.

William Stevens

Partner, Head of Wealth Planning

When can I access my SIPP?

You can start accessing money from your personal pension, including your SIPP, at age 55, although this will rise to 57 on April 6, 2028. This is known as the Normal Minimum Pension Age (NMPA).

The State Pension, on the other hand, requires you to wait until you're 66 to claim – also rising to 67 between 2026 and 2028. SIPPs are beneficial because their withdrawal rules allow you to access them early, but you can also have the option to access them flexibly - tailoring the income to suit your retirement needs.

However, it’s important to remember that just because you can access your SIPP from age 55, it doesn't mean you should do. Many people might choose to leave their pension invested for longer, allowing it to potentially grow further.

As always, the decision of when to start withdrawing from your SIPP should align with your personal circumstances, financial requirements, and long-term retirement goals. Speaking to a professional financial Adviser will ensure each of these key factors is considered when exploring SIPP withdrawal rules.

Capital at Risk

Please be aware that the value of your investments may fall as well as rise. The content of this blog post reflects our current understanding of UK legislation and only impacts those within the UK tax system. Tax treatment depends on personal circumstances, and the rules may be subject to future change.

Tax rules for different SIPP withdrawal methods

Once you’ve reached the minimum pension age, you have several options for how you want to access your SIPP. Each method comes with different rules, processes, and tax implications, and understanding these can help you make the most of your retirement savings to fund your desired lifestyle.

Tax-free lump sum

One of the biggest advantages of SIPP withdrawal rules is the ability to take up to 25% of your pension pot tax-free.

The maximum amount you can take is £268,275, known as the Lump Sum Allowance (LSA), which is 25% of the total individual Lump Sum and Death Benefit Allowance (LSDBA). This limits the total amount of tax-free cash you can take from your SIPP under the age 75, which is currently £1,073,100 for the 2025/26 tax year. This replaced the previous Lifetime Allowance of £1,073,100, which was abolished in April 2024.

Any remaining funds left in your pension pot will stay invested until you choose to access them, which will be taxed according to the specific withdrawal rules of how you access them. Also, any lump sum you take will reduce the total LSDBA you have remaining, should you need to withdraw any more funds due to circumstances of illness.

You can access the entire 25% in one go or do it in increments, as long as the total amount is within the limit. You may choose this to help with paying off your mortgage, supporting educational fees for loved ones, or funding any big purchases that align with your retirement goals.

Also, you don't need to take the entire 25% tax-free cash from your pension before you start taking regular income, known as income drawdown. You can take a mixture of tax-free cash and taxable income from your pension to suit your retirement needs. For example, if you have a £1m pot, you can take £25k as tax-free cash, have £75k as regular income, and leave £900k untouched in your SIPP.

Income drawdown

Once you've taken your 25% tax-free lump sum, you can move the remaining 75% of your pension into what's known as income drawdown. This allows you to keep the rest of your SIPP funds invested whilst you withdraw as much or as little income as you need, when you need it.

Any income taken is subject to Income Tax at your marginal rate. For example, if you're a basic rate taxpayer, you'll pay 20% tax on the income you draw, and higher rate taxpayers will pay 40%. Also, taking income can move you up through tax bands, which means it isn’t a flat rate, but one that is constantly subject to your marginal rate of income depending on how much you draw

The advantage of drawdown is that you can flexibly withdraw however much you need from your pension pot, whether you want a regular monthly or annual income, or simply choose to access the funds and manage your income tax position. The rest of your SIPP will remain invested, leaving room for potential growth to build your retirement wealth even more.

Uncrystallised funds pension lump sums (UFPLS)

Another option for accessing your SIPP pot is through UFPLS, which allows you to take your funds as a lump sum, or series of lump sums, where 25% of each withdrawal is tax-free, and the remaining 75% is taxed as regular income. This essentially blends together tax-free cash and regular taxable income in one lump sum payment.

This is not to be confused with tax-free cash, which allows you to take 25% of your entire pension pot tax-free whilst automatically crystallising the remaining 75% of your pot, where you must access it as income or purchase an annuity. Instead, UFPLS allow you to take regular lump sums where you only pay tax on 75% of each lump, and the remaining pension pot is left uncrystallised - meaning you don’t need to start drawdown and begin accessing the funds.

Any funds withdrawn as UFPLS are subject to your LSA and LSDBA.

Annuity income

Another option for SIPP withdrawal is using your pension fund to purchase an annuity. This is a contract with an insurance company that guarantees a defined income for the rest of your life, or a specific period.

After taking your tax-free lump sum, you can give the remainder of your pension – or just a portion of it – to an insurance company in return for this guaranteed income, which is taxable at your marginal income tax rate.

Annuities can provide financial security by ensuring you won't run out of money during your retirement, no matter how long you live. However, wider economic factors can significantly impact how much total income you receive after purchasing your annuity, so be sure to consult with an Adviser to determine whether this is the most beneficial use of your savings.

How this affects future pension contributions

Another key factor to consider surrounding SIPP withdrawal rules is the Money Purchase Annual Allowance (MPAA). This is a specific allowance that triggers once you start taking money from your SIPP in a flexible format - i.e., not including tax-free cash or annuity., and it limits how much you can contribute to your pension tax-free each year. The current MPAA reduces your annual contributions from £60,000 to £10,000.

It's important to understand that not all ways of accessing your pension will trigger the MPAA. The MPAA is only triggered when you:

Take lump sums directly from your pension that are beyond the 25% tax-free limit.
Start income drawdown.
Purchase a flexible annuity where the income can vary.

The MPAA is not triggered when you:

Only take your 25% tax-free lump sum and leave the remaining 75% invested.
Buy a lifetime annuity that provides a guaranteed income.
Take your entire pension pot as tax-free cash – up to the LSDBA – due to ill health circumstances.

This is particularly important to consider if you're planning to continue working and making pension contributions after accessing your pension. The reduced annual allowance could significantly impact how you save for retirement in a tax-efficient way.

If you have a life expectancy of less than a year due to severe illness, you may be able to take your entire pension pot as a tax-free lump sum. However, this only applies if you’re under 75 and your pension pot does not exceed the individual LSDBA.

Any instances outside of these specific criteria will not permit you to access your SIPP before the NMPA.

What happens when you inherit a SIPP?

SIPPs are passed down through an expression of wishes, where the original pension holder determines who they would like to be the beneficiaries of the SIPP funds when they die. This is usually done by completing an expression of wishes form with your SIPP provider.

This is highly important, since your SIPP provider is normally in charge of who receives your pension funds after you die, so you need to inform them of exactly who you want the beneficiaries to be. Also, an expression of wishes allows your pension funds to be passed on more tax-efficiently than if you included your SIPP in your will. If you were to pass on your pension in your will, instead of just expressing your wishes, the value of the death benefits will normally be included in your estate for IHT purposes.

Inheriting a SIPP comes with different withdrawal rules compared to your own pension. It’s essential to understand these rules for both effective estate planning and managing an inherited pension.

When you inherit a SIPP, there are different withdrawal rules for when and how you can access the funds. For instance, you don't need to wait until the minimum pension age to access an inherited pension. The specific tax implications for inherited SIPPs according to the age of the original pension holder at the time of their death are as follows:

If the original pension holder died before age 75: Under current rules, any withdrawals you make from the inherited SIPP will typically be tax-free, whether taken as a lump sum or as income drawdown.
If the original pension holder died after age 75: Any withdrawals from the inherited SIPP will be subject to Income Tax at your marginal rate, whether you take the money as a lump sum or as regular income.

It's worth noting the changes that are set to take place from April 2027. Most unused pension funds and death benefits will be included within the estate for Inheritance Tax (IHT) purposes. This means that you may need to pay IHT on any funds that exceed the IHT threshold – currently £325,000 - up to 40%.

This could significantly impact the amount you receive as a beneficiary, so it's worth seeking expert financial advice on effective estate planning and protecting your wealth when passing a SIPP on to your beneficiaries.

Professional guidance will also benefit you when dealing with many other important considerations, such as transferring the pension and knowing how and when to contact the SIPP provider to inform them of the death and arrange for the transfer of ownership.

An Adviser could also help you determine when to start withdrawals. Since the tax treatment depends on the age of the deceased at death, your Adviser could also help you time your withdrawals to mitigate any significant tax implications, especially if you have other income sources.

Pensions transfer

Pension transfers can be complex and for some types of pension, you might wish, or be required, to take regulated advice about your options. This is particularly relevant for those with guaranteed benefits, such as defined benefit schemes and any other pensions with safeguarded benefits.

Shape a future that works for you

Navigating SIPP withdrawal rules requires careful consideration of your personal circumstances, long-term financial goals, and the type of lifestyle you want during your retirement.

The options available to you – taking a tax-free lump sum, using income drawdown, or purchasing an annuity – each come with their own advantages and considerations, so you need the right approach to build your wealth effectively.

Our experienced Wealth Planners can help you devise a clear and comprehensive retirement plan that addresses these complex decisions. We take the time to understand your personal circumstances and financial goals, providing tailored advice on how to make the most of your pension savings.

Whether you're approaching retirement, already retired, or looking to get started on planning and saving for retirement early, our team is here to help you shape a future that works for you. Contact us today to take the first step towards a more secure and fulfilling retirement.