Is a crystallised pension still invested?

Imagine that you’ve just retired and after decades of hard work and savings, your pension pot sits at a few hundred thousand pounds. Now, you might have heard about ‘crystallising’ your pension to take out the amount you may need but this one question confuses you: is a crystallised pension still invested? Or does it stop growing the moment you touch it?

It’s a tricky question but has a straightforward answer. So in this guide, we’ll explain what happens to your pension after crystallisation, whether it still remains invested or not and all the risks and benefits that come with it.

Keep reading to learn more.

What is a crystallised pension? Understand the concept first

When you "crystallise" your pension, it means convert some (or all) of your pension pot into accessible income. You can then cash out via drawdown or an annuity. This is an important step that allows your retirement funds to be unlocked for use.

But is a crystallised pension still invested after this process? Absolutely. Here’s how pension crystallisation works:

• You choose how much of your pension you want to withdraw (e.g. 25% will be tax-free, the rest of 75% will be taxed).
• The crystallised amount is moved to a "drawdown" account where it may still remain invested.
• The remaining “uncrystallised” part of the pension fund stays in your pension pot and can continue to grow tax-free until you decide to take it out.

 

Let’s consider, as an example, that you crystallised 50% of your £300,000 pension. Then you’ll be able to take £37,500 tax free (25% of £150,000) and leave £112,500 as an investment in the drawdown. The rest of the £150,000 will still remain uncrystallised.

What happens to your pension pot after crystallisation?

• Crystallised funds: They are still invested in drawdown (stocks, bonds, funds).
• Uncrystallised funds: They are still in your pension where they grow tax-free.

 

Is a crystallised pension still invested after accessing it?

This is a million-pound question. And the answer is yes but only if you choose drawdown. Here are some crucial points to consider:

• Your money remains in investments (e.g shares, funds, bonds) and earns returns.
• You can withdraw some of the funds as your income while the rest stays invested.
• Investment growth within a pension pot remains tax-free.

 

Again, as an example, let’s assume that you decide to take £200,000 pension funds and then withdraw £50,000 (25%) out of £200,000 tax-free cash. You can keep the remaining £150,000 invested in global equities and bonds. After 10 years, for instance, your investment will grow to £210,000 (if we assume 4% annual increase) and you’ll still have enough for your basic living expenses as well as for investments.

So, is a crystallised pension still invested? Yes, it is. However, crystallising your pension doesn’t mean that you’ve to cash out all of your pension. It's a tax event, not an investment freeze.

Risks of keeping your crystallised pension invested

If you wish to keep your pension invested, it may increase your retirement income, but there are still some risks that you shouldn’t overlook:

Market volatility:

Sometimes, market trends are hard to predict. An unexpected market crash could shrink your drawdown pot. For example, a mere 20% drop can wipe off £30,000 off a £150,000 invested pension.

Sequence risk:

That’s another risk related to market volatility. If you withdraw your income during a market downturn, you may incur huge losses which might result in your pension pot running dry sooner than you’d expect.

For example, taking £10,000/year from a shrinking pot could deplete it 5–10 years earlier.

Tax traps:

Withdrawals above your 25% tax-free lump sum are taxable as income. For instance, even a total withdrawal of £12,580 could push you into from 0% to a 20% tax bracket. A £51,000 annual withdrawal would push you into the 40% tax bracket.

So is a crystallised pension still invested worth the risk? For many, yes but only with a plan and proper guidance.

Benefits of keeping your crystallised pension invested

For most people, the benefits of an invested crystallised pension remain greater than the risks:

Growth potential:

No guesses there. Long-term investments usually tend to grow significantly. A £100,000 pot that grows at 5% annually becomes £162,889 in 10 years.

Flexibility:

You can adjust your income withdrawals according to the market performance or your lifestyle needs. If the market is bearish, you can take out your funds to avoid any further losses.

Tax efficiency:

The best part about your invested pension is that you only pay taxes according to the amount you withdraw, not what you keep invested. This means you can withdraw less to stay in the lower tax brackets and also enjoy the tax-free status of your remaining investments, no matter how much they are.

Inheritance advantages

The unspent drawdown pension pots can pass on to your heirs tax-free in the event of your demise before the age of 75.

Conclusion

So, is a crystallised pension still invested? Absolutely. If you keep your funds in drawdown, you can grow your retirement savings and also use them as an income. However, this is not just a run-of-the-mill decision that you can make without thinking it through, planning carefully to avoid the market risks and benefit from the tax rules.

Here at Regulated Advice, we’re committed to guide you through these important steps. We will connect you with FCA-authorised advisors who’ll help you prepare a plan that is customised for your specific situation and which allows your retirement funds to work as effectively as you did in your professional life.

Ready to crystallise your pension with confidence? Let us connect you with an expert today.