When can you take money from your pension?
In 2015 some restrictions on access to pensions were eased and so you can now access your defined contribution pension from age 55 (set to rise to age 57 from 2028). If you have a defined benefit pension then the rules may be different and you will need to check your pension scheme details to find out more.
Whilst it is very tempting to access your pension early, you need to be aware that your pension pot is there to finance the remainder of your life and depleting it too early can result in financial difficulties later in life. It is worth bearing in mind at this point that the current life expectancy of a male aged 55 living in the UK is around 80 years of age with a female expected to live to around age 84. Therefore at the age of 55, it is likely that you will need income to support you for around 25 Years.
What options are available if I want to take my pension and still work?
There are a number of options available when you access your pension and they are as follows:
Take part of your pension pot in cash and leave the remainder invested
You can take 25% of your total pension in cash without paying any tax. If you do this and leave the remainder of your pension pot invested this will continue to grow over time. Using this approach can provide you with a lump sum that you could use to pay off your mortgage or other large debt. Reducing your outgoings in this way could mean that you can continue to work, maybe with reduced hours, and still maintain your current level of income.
Take some or all of your tax-free cash and buy an annuity with the remainder
An annuity is an income for life that is provided in exchange for a lump sum. If you decide to purchase an annuity your income will be fixed for life and your pension pot will not benefit from any future investment growth. If you decided to purchase an annuity at the age of 55 then the amount of income you receive will be substantially lower than if you waited until a more typical retirement age such as 65.
Purchase an annuity with your total pension pot
The same issue will arise as detailed in the section above where purchasing an annuity at age 55 would leave you with a comparatively low income compared with an annuity purchased at an older age.
To find out more about annuities read our article - What is an annuity and how does it work?
Access your pension using pension drawdown
You can start accessing your pension from the age of 55 and this includes a flexible option known as pension drawdown. If you are thinking about carrying on working but would like some access to your pension then pension drawdown may be an option worth considering.
Pension drawdown is like a pension tap that you can turn on and off, increase or decrease as your income needs dictate. With a pension drawdown arrangement, you can still take 25% of your pension pot tax-free.
For more information read our article - How to compare the best pension drawdown providers
Taxation of pension benefits
Although you can access 25% of your pension pot tax-free any further income will be taxed at your marginal rate of tax. If you take your pension benefits at age 55 and carry on working you will probably have already used up all of your current tax-free personal allowance of £12,570 (2022/23), so all your drawdown income will be taxed. If you are paying income tax at a higher rate (40% or 45%) through your employer, then you could consider earning a lower income or taking less from your pension to bring you under the higher or upper rate threshold and reduce the income tax your pay.
The table below shows where tax is paid on the various pension choices detailed above.
|The pension options||Tax-free part||Taxable part|
|Take small cash sums||25% of each withdrawal||
75% of each withdrawal
|Withdraw your whole pension in one go||25% of your whole pension pot||
75% of your whole pension pot
|Buy an annuity||25% of your pot before you buy an annuity||
Any income from the annuity
|Pension drawdown||25% of your pot before you enter pension drawdown||
Any income taken from your investments
|Mix of the above||Depends on the options you mix||
Depends on the options chosen
|Leave your pension pot untouched||Your pension pot remains invested in its tax-free wrapper||
Nothing taxable until you access your pension
Can I still contribute to my pension if I am taking some pension benefits?
Yes, if you continue to work and take pension benefits you can still contribute to a pension up to the amount of your total annual income with a maximum contribution limit of £40,000 per annum. So if you earn £15,000 a year that will be the maximum you can pay into a pension and obtain tax relief. This will top up your pension pot meaning you can continue to enjoy future growth to provide income later in life.
Can I take my state pension and still work?
Before you reach your statutory retirement age you will receive a notice informing you of how to claim your Basic State Pension. If you do nothing your state pension will remain unpaid until you decide to claim it. If you defer your state pension for at least 5 weeks you will receive a higher pension when you eventually claim it.
To find out your personal statutory retirement age go to - Check your State Pension age
Things to consider before taking your pension and continuing working
- Reduce the hours that you work and still maintain your standard of living by accessing your pension
- Access a tax-free lump sum to reduce or pay off your mortgage or other debt and reduce your outgoings
- Carry on working and contributing to your pension
- Carry on working and defer taking your State Pension and get a larger pension later
- Taking your pension early will deplete the pension pot that you may need in later life
- Be aware of the life expectancy for your age before accessing your pension
- Consider all the options for accessing your pension so that you choose the best option for you