Withdrawing a transferred DB pension, without investment risk

Money that is already in a defined contribution pension, including money transferred from a defined benefit scheme, can be withdrawn without investment risk, for example by using a fixed-term annuity that pays a set amount each year for a fixed period, or by holding cash. But the first question for anyone with a defined benefit pension is whether to give up a guaranteed income at all, and for most people the answer is no.

The situation

Illustrative example: imagine Peter, 62. He is married with no dependants, and has a defined benefit pension from a job many years ago. His scheme has written to say he could take an income of £5,800 a year in three years' time, or a cash equivalent transfer value (CETV) of £140,000.

• Age 62
• Married, no dependants
• Current pension and investment income: £20,000 a year
• Outgoings: £18,000 a year
• A buy-to-let property with a £45,000 mortgage
• His home, with a £40,000 mortgage

Peter had not realised his pension had a cash value and is surprised at the figure. He wants to know whether he could use it to pay for an extra room on his buy-to-let property, and use anything left over to pay off his mortgages.

He is not interested in the income, because he and his wife already have enough pension income to cover their outgoings. They are both due to start receiving their State Pensions in a few years, which will add more guaranteed income.

What a regulated adviser would weigh up

Because Peter's safeguarded benefits are worth more than £30,000, he would have to take regulated advice from an FCA-authorised adviser with the pension transfer permission before he could transfer. The FCA's starting assumption is that a transfer is unlikely to be suitable for most people.

To analyse any case where someone is thinking of giving up safeguarded benefits, an adviser would look at a number of factors, including:

• What benefits would be given up, and whether the CETV could be used to replace them in future, for example by buying an annuity. The adviser must give a transfer value comparator (TVC) showing this.
• What the person's main priorities are, and why.
• What position they would be left in if the money were taken and markets then fell.
• Whether their objectives could be met in another way.

In this example, Peter has no other savings and does not want to borrow more to pay for the building work. His only significant accessible asset would be his pension.

He does not need the income from the scheme now. But a guaranteed, index-linked income for the rest of his and his wife's lives is valuable in later life, for example if one of them needs care, or if the rental income falls.

Peter estimates the building work might add around £50,000 to the property's value and around £5,000 a year to the rental income. Those figures are uncertain. Property values and rents can fall, buy-to-let carries its own costs, tax and risks, and putting pension money into a single property concentrates his wealth in one asset.

Likely outcome of regulated advice

Where someone wants to transfer to repay debt or to pay for something like a property project, a regulated adviser would expect to look very closely at other ways of meeting that need first. In an example like Peter's, a regulated adviser might typically point out that:

• The guaranteed income, with increases and a spouse's pension, would be expensive to replace.
• Other options may exist, such as borrowing against the buy-to-let property, extending his mortgage term or delaying the work.
• Taking the money out quickly would mean paying income tax on most of it.

Under the current rules, the likely outcome of regulated advice for someone in Peter's position would usually be to keep the defined benefit pension. Every case is different, and only full regulated advice can reach a firm conclusion.

If the money is already in a pension pot: withdrawing without investment risk

The rest of this article looks at a different question: how someone could take money out of a defined contribution pension without investment risk. This might apply to someone who transferred a DB pension in the past, or who simply has a pension pot and wants to draw it over a few years.

The usual product for money transferred from a DB scheme is flexi-access drawdown, which keeps the fund invested and allows flexible withdrawals. But drawdown does not suit everyone. Imagine someone in our example who already held £140,000 in a pension pot, wanted to take it all over a short period without paying higher rate tax, and did not want any investment risk.

With taxable income of around £20,000, they would have roughly £30,000 a year of the basic rate band left before reaching the higher rate threshold of £50,270 (2026/27 rates for England, Wales and Northern Ireland). Spreading withdrawals over around five years could keep most or all of the taxable part within the basic rate band.

With a five-year timeframe, many advisers would be cautious about investment risk anyway. Investing is generally for the medium to long term, often taken to mean five years or more, because a shorter period gives a fund little time to recover from a fall.

A fixed-term annuity

One option is a fixed-term annuity, sometimes set up as a "cash-out" plan. In this example it might work like this:

• £35,000 (25%) taken as tax-free cash straight away.
• The remaining £105,000 used to buy a fixed-term annuity paying a fixed amount, for example around £22,000 a year, for five years.

There is no investment risk and no ongoing fund charge, and the payments are known in advance. Each payment is taxed as income in the year it is paid. The figures above are for illustration only: the income a fixed-term annuity pays depends on rates at the time and the provider's terms. Shop around, and check what happens to remaining payments if you die during the term.

Other ways to reduce investment risk include holding the money in cash within a drawdown plan and taking it in stages, or buying a lifetime annuity for part of the fund. Each has different costs, flexibility and tax effects.

Remember too that taking a taxable payment flexibly from a pension pot usually triggers the money purchase annual allowance, which limits future tax-relieved contributions to defined contribution pensions to £10,000 a year. And unused pension funds and most death benefits are due to come into the scope of inheritance tax from 6 April 2027, which may affect how and when people choose to draw their pension.

Getting help

For free, impartial guidance on your pension options, contact MoneyHelper. If you have defined contribution pensions and are 50 or over, you can book a free Pension Wise appointment. Be wary of anyone who contacts you out of the blue about your pension, and check the FCA ScamSmart site before dealing with any firm.

If you have a final salary pension and would like to understand how DB transfers and the advice process work, you can book a free chat about how the process works. It is general information, not advice.

Learn about: What is abridged advice? You can find more illustrative examples in our case study section.

Frequently asked questions

Can I withdraw a transferred DB pension without investment risk?

Yes. Once money is in a defined contribution pension, it can be withdrawn without investment risk, for example by buying a fixed-term annuity that pays a set income for a fixed number of years, or by holding cash and withdrawing it in stages. A fixed-term annuity has no market risk, and the payments are known in advance. Whether to transfer a DB pension in the first place is a separate, much bigger decision.

What is a fixed-term annuity and how does it work for pension withdrawals?

A fixed-term annuity pays a guaranteed income for a set period, such as five years. Unlike drawdown, the money is not exposed to market movements. For illustration, a £140,000 pension pot might provide £35,000 as an immediate tax-free lump sum, with the rest buying a fixed income for five years. The amount depends on rates at the time. It can suit people who want certainty over a short period.

What does an adviser consider before recommending a DB transfer?

A regulated adviser with the pension transfer permission looks at what benefits would be given up, whether the CETV could replace them (using a transfer value comparator), the person's priorities and objectives, their position if markets fell after a transfer, and whether their objectives could be met any other way. The FCA's starting assumption is that a transfer is unlikely to be suitable for most people, and a transfer should only be recommended where it is clearly in the person's best interests.

How can I avoid going into a higher tax band when withdrawing my pension?

Pension income is taxed as income. To avoid paying higher rate tax, which applies to income above £50,270 in England, Wales and Northern Ireland, withdrawals can be spread over several tax years. For example, with other taxable income of £20,000 you would have roughly £30,000 of basic rate band left each year. A regulated financial adviser can help you plan withdrawals tax-efficiently.

Is flexi-access drawdown always the right product after a DB transfer?

Not always. Flexi-access drawdown is the most common product for money transferred from a DB scheme, because it keeps the fund invested and allows flexible withdrawals. But it may not suit someone who wants no investment risk over a short period, where a fixed-term annuity or cash may be more appropriate. The right choice depends on the person's circumstances, objectives and attitude to risk.

This is a hypothetical, illustrative example. Peter is not a real person and the figures are examples only. It is not financial advice and should not be relied on for any decision about your pension.