When can I access my pension?
The type of pension you have will determine when you can access it.
- Workplace pensions can usually be accessed once you turn 55, with the employer’s permission.
- Defined Benefit pensions can sometimes be accessed when you turn 55, but vary by plan.
- Private pensions can usually be accessed when you turn 55, but you may incur penalties for doing so. Note that the age you can access a pension will increase to 57 from 2028.
You may be able to access your pension even sooner if:
- you’re forced to retire early due to poor health
- your provider agreed a ‘protected retirement date’ before 6 April 2006 due to working in a demanding career (eg. professional athletes or those with hazardous occupations).
The State Pension
A State Pension can only be accessed once you reach retirement age and pays a fixed amount each month. There are no other ways to withdraw money from your State Pension.
Can I access my pension while I work?
You can continue to work while you withdraw money from your pension.
This can be useful if you need a quick cash boost to immediately pay off a mortgage, clear debts, or take the family on a holiday, for example.
However, withdrawing from your pension early reduces the amount of time it has to grow. This will reduce your future pension earnings. It may also push you into a higher income tax band.
If you do decide to take your pension at 55 while you work, there are several ways of doing it.
Take all of it as cash
It’s as simple as it sounds; you can withdraw the whole pension without penalty. However, there could be tax implications depending on the size of the pension pot.
You’ll get the first 25% as a tax-free lump sum, but you’ll need to pay tax on the remaining 75%.
The remaining 75% will contribute to your annual income and could move you into the upper income tax band.
Take some of it as cash and leave the rest invested
You can withdraw as much or as little of your pension pot as you need, leaving the rest to grow. Taking money out of your pension is known as a drawdown.
25% of your pension pot can be withdrawn tax-free, but you’ll need to pay income tax on the rest. You can choose whether to withdraw the full tax-free part in one go or over time.
This is the most flexible option. The key difference is that you’ll pay tax on 75% of the income, and the remaining amount will remain invested.
Take 25% of it as cash and buy an annuity with the rest
An annuity is a special type of insurance policy that provides you with a fixed income. There are many types of annuity, but it’s usually used to guarantee income for a set number of years or the rest of your life.
You won’t pay tax on the 25% you withdraw from your pension, but you will have to pay income tax on income from the annuity.
We’ve partnered with Legal & General to offer a pension annuity. You can get a quote and apply online, you just need to provide some basic details around your pension savings and any health conditions.
A mix of the above
Depending on your needs, you can choose more than one of these options.
For example, you may want to take out a lump sum and only use half of the remainder to buy an annuity.
The implications of mixing more than one approach can be complicated and it may be useful to speak with a financial adviser first.
How much tax will I need to pay?
The first 25% of your pension pot can usually be withdrawn tax-free. Any further pension income will contribute to your annual earnings.
The annual tax allowance is set at £12,570 for the tax year (2024/25). That means you won’t have to pay tax on the first £12,570 of annual earnings.
Let’s look at two examples of how your pension might affect your tax payments. We’ll assume that the tax-free part of your pension has been received already.
If you’re retired and receive taxable pension income:
- You receive £20,000 from your pension
- You won’t pay tax on the first £12,570
- You’ll pay tax on the remaining £7,430
- The tax band for earnings from £12,571 to £50,270 is 20%
- So you’ll pay £1,486 in tax (£7,430 * 20%)
If you’re working and receive taxable pension income:
- Your annual work salary is £20,000
- You receive £20,000 from your pension
- You won’t pay tax on the first £12,570
- You’ll pay tax on the remaining £27,430
- The tax band for earnings from £12,571 to £50,270 is 20%
- So you’ll pay £5,486 in tax (£27,430 * 20%)
Bear in mind that any other income (from savings, etc) can also contribute to your tax payments.
Can I keep contributing after taking money out of my pension?
Yes, however the amount you’re allowed to contribute each year may be reduced.
Annual Allowance
Usually, the maximum amount you can pay into a pension each year is £60,000. The Government rewards you for paying into your pension by providing tax relief on contributions of up to £60,000 a year gross (or 100% of your taxable salary if less).
Money Purchase Annual Allowance (MPAA)
Once you’ve taken money out of your pension, that annual limit is reduced to £10,000 a year.
There are some circumstances where the MPAA won’t apply:
- Your pension is worth less than £10,000
- Your pension is a defined benefit scheme
- You withdraw a tax-free lump sum and buy a lifetime annuity
- You withdraw a tax-free lump sum only and don’t take a taxable payment
What are the pros and cons of taking my pension early and continuing to work?
Taking money out of your pension early can significantly impact your pension’s opportunity to grow, even if you continue to contribute to it. So think carefully before doing so. If you’re unsure, speak with a financial adviser.
Pros:
- You may be able to reduce your working hours thanks to extra pension income
- You may have more money to spend after paying off recurring expenses such as a mortgage with your early pension income
- You could benefit from regular fixed income if you buy an annuity
- Your pension pot can continue to grow if you don’t take all of it out
- You could afford to delay taking your State Pension until later (known as ‘deferring’) and receive a higher amount in later years
Cons:
- Your pension’s ability to grow will be reduced if you reduce the size of the pot
- You may need to pay more tax if your overall income is significantly higher
If you decide to take your pension at 55 and still work, and you have a PensionBee account, you can learn more about pension withdrawal.
If you decide to retire at 55 without continuing to work, it’s worth considering how much pension you will need to retire.
Risk warning
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
Last edited: 06-04-2024
