Once upon a time, stopping working and starting to draw your pension were virtually synonymous. Typically, one day you had a job and received a regular salary. The next you were officially retired and reliant on your pension for income. These days the lines are more blurred. Phased retirements are increasingly common and many people start to access their pension well before they quit employment for good. If this is something you’re considering, read on to find out more about the plus and minus points of mixing and matching pension and employment income.
When can I access a private pension?
The earliest you can usually take money out of a private pension – also known as a personal pension – is age 55. This age is due to rise to 57 from 2028. If you take out money before this age, you’ll incur a very high tax charge for an “unauthorised” withdrawal.
Private pensions are pensions that you set up yourself, as opposed to workplace pensions that are arranged by your employer, or the State Pension.
If you have a workplace pension, the age at which you can access it may depend on the type of scheme. If you have a defined contribution (DC) scheme, you are likely to be able to access it at the same time as a private pension. If you have a defined benefit (DB) scheme, the default age at which you start receiving your pension income may be higher (60 or 65, for example) – though you may be able to change this default.
You’ll start getting state pension when you reach state pension age. This is 66 years old as of March 2022 and is due to rise to 67 by 2028.
Am I able to take money out of my private pension while still working?
Yes. A couple of changes that have taken place in relatively recent years mean that there is no longer the same clear link between someone starting to draw their pension and stopping working.
The removal of the Default Retirement Age in 2011. This meant that employers could typically no longer force workers to retire at age 65.
Increased flexibility in the way pensions can be accessed. This was introduced in 2015 and is commonly known as “pension freedom”.
Between them, these changes mean that you are free to continue working after you start to take money out of your pension. This can be either full-time or part-time, and in the same job or a different job.
Can I take my tax-free pension lump sum and still work?
From the age of 55, you are entitled to take 25% of the total value of your pension without paying tax on it. This is often referred to as the pension tax-free lump sum.
One option is to take this lump sum before you officially retire, and leave the rest of your private pension invested, to be used as income at a later date.
No matter when you withdraw this lump sum, there’s nothing stopping you from continuing to work thereafter. And, because the lump sum is tax-free, it won’t push your employment earnings into a higher income tax bracket.
Can I take a monthly income from my private pension and still work?
Yes, you can. There are 2 main ways of taking an income from a private, defined contribution pension:
An annuity. You can use some or all of your pension pot to buy an annuity. This then pays out a regular income for a fixed term or for life. The level of income you’ll receive depends on how much you spend on the annuity and the rates offered by the provider.
Pension drawdown, also known as income drawdown. With this option, you leave your money invested in a pension drawdown scheme. You can withdraw money out as you need it. This approach is more flexible. However, it also poses the risk of you running out of money if you withdraw too much too soon, your investments perform badly or you live longer than expected.
You can continue working while taking a monthly income from your pension in either of these ways. Bear in mind your monthly pension income will be liable for income tax alongside your employment income. It could risk pushing you into a higher tax bracket, especially if you continue to work full-time.
Some people choose to taper their retirement by taking a small pension income while continuing to work part-time. This can help with an improved work/life balance for those who want to ease off on working from their mid-50s. Or, if you don’t start drawing an income until after a more traditional pension age (65, say), continuing to work part-time means you’ll be able to take a smaller pension income. This will help your pension savings last longer.
How can I still work while withdrawing from my private pension?
There’s no trick to it. Your employment agreements and your private pension are entirely unrelated. You simply access your private pension as needed and carry on with your work as normal.
Do I have to tell anyone about working and withdrawing from my private pension at the same time?
It’s a good idea to let HMRC know if you start receiving income from 2 separate sources. This is so it can make sure you have been assigned the correct tax code from the outset. This will ensure that both your employer and the pension provider deduct the right amount of tax from your payments. It can avoid you paying too little tax initially and then facing an unexpected underpayment bill down the line.
If you’re self-employed and continue to work, you’ll need to continue to complete a Self Assessment tax return as normal and declare pension income on this.
Can I carry on working after I start receiving my state pension?
Yes, if you want to. If you’re not ready to retire when you reach state pension age (66 as of March 2022 and rising to 67 from 2028), you can carry on working full-time or part-time. When you approach state pension age, you’ll be given the choice of whether to start receiving state pension straight away or defer receipt until a later date. If you choose to start receiving it at the default age, your state pension income will be combined with employment and any other income to establish your tax code and which income tax bracket you fall into.
If adding your state pension into the mix will push you into a higher income tax band, you may choose to defer it. The amount of state pension you eventually receive will increase by the equivalent of 1% for every 9 weeks you defer.
How much tax will I need to pay if I am still working when I start drawing a pension?
If the only money you take from your pension is your 25% tax-free lump sum, this won’t affect your income tax on other earnings at all.
If you take money from your pension other than the lump sum, this will be combined with any other income to calculate how much tax you pay.
Worked example: How working and drawing a pension income can affect your income tax payments
Let’s say you’re 54 and currently working in a job that pays you a net income of £45,000 a year. This makes you a basic-rate taxpayer. You’ll pay 20% income tax on the income above your annual Personal Allowance. For the 2022/23 tax year, the Personal Allowance is £12,570. This means you’ll pay 20% basic-rate income tax on £32,430 of your income, equating to a tax bill of £6,486.
You then decide, at age 55, to withdraw your 25% tax-free pension lump sum. You also decide to supplement your income by starting to withdraw an extra £10,000 a year from your pension.
This would push your total income for the year to £55,000. As the upper threshold for basic-rate tax is £50,270, this would push some of your income into the higher-rate income tax band of 40%. So you’d pay:
Basic-rate income tax of 20% on £39,700 (the amount of income between £12,570 and £50,270): £7,540
Higher-rate income tax of 40% on £4,370 (the amount of income above £50,270): £1,892
If you were to reduce the amount you withdrew from your pension pot to £5,000 rather than £10,000 a year, this would keep you within the basic-rate income tax band. If you’re able to afford to hold off on taking out that extra £5,000 a year from your pension until you stop working (assuming your salary and tax bands stay the same) and your final retirement income from your pension alone is less than the higher-rate tax threshold, this could save you £946 a year in income tax.
Can I keep contributing to a private pension after I’ve taken money out?
Yes you can. While taking money out only to then start paying back in might sound like an odd thing to do, there can be good reasons for doing so. For example, you might want to take out your 25% tax-free lump sum to pay off your mortgage or to cover an immediate large expense, but still want to reap the tax and other benefits of contributing to your pension.
Be aware, though, that taking money out of your pension might restrict how much you can subsequently pay in each year and benefit from tax relief.
The standard annual allowance for pension contributions is £60,000 (or the equivalent of your annual earnings, if this is lower). This allowance will continue to apply after you take money from your pension if:
You take a tax-free cash lump sum from a defined contribution pension and buy a lifetime annuity with the rest; the annuity must provide an income that stays level or increases
You take a tax-free cash lump sum from a defined contribution pension but don’t withdraw any taxable amounts
You cash in small pension pots worth less than £10,000
However, if you take money from a defined contribution pension that falls outside of the conditions above, you’re likely to trigger something called the Money Purchase Annual Allowance. This reduces the maximum amount you can contribute each year and get tax relief to £4,000. Types of withdrawal that could trigger this include:
If you withdraw your entire pension pot, or start to take regular, taxable lump sums
If you move your funds into a pension drawdown fund and start to take an income
If you buy an annuity where your income could go down, such as an investment-linked or flexible annuity
The Money Purchase Annual Allowance only applies to defined contribution pensions and not to any defined benefit pensions you might have with an employer.
What are the pros and cons of taking my pension early and continuing to work?
Pros
You can take out 25% of your pension as a tax-free lump sum from age 55, without it affecting the tax you pay on employment income.
Starting to take your pension early could allow you to pay off debts, such as your mortgage, giving you more disposable income.
You may be able to reduce your working hours and achieve a better work/life balance by supplementing your employment income with your pension.
Cons
If you take out more than the tax-free lump sum, this could push you into a higher tax bracket.
If your employment income changes, you may wish to review how much pension income you’re receiving. If you’ve opted for an annuity, it may not be possible to reduce your pension income to account for increased employment earnings.
If you take money out of your pension early, this will reduce the amount you have to live on when you officially retire.
If I’m phasing my retirement, how should I draw my pension?
There’s no right or wrong answer to this, as it depends on your specific circumstances. The main thing to consider is the tax implications of receiving employment and pension income at the same time. Because of this, you may wish to draw a smaller pension amount while you’re still working (even part-time) than you plan to when you retire fully. Pension drawdown might be a more flexible option in this circumstance, as you can adjust the amount you take out over time. But you could also opt to buy an annuity with only a small part of your pension pot and leave the rest invested.
If you’re considering a phased retirement, it’s a good idea to speak to a regulated financial adviser to work out the best options. Directories that can help you search for a regulated financial adviser based on what you’re looking for include the government’s MoneyHelper website, the Society of Later Life Advisers, The Personal Finance Society and Unbiased.
Bottom line
Accessing some or all of your private pension pot while continuing to work can be a good way to pay off outstanding debts, reduce your working hours from age 55 without affecting your standard of living or even delay the need to rely fully on your pension later in life by supplementing it with part-time employment. Regardless of your age you’ll need to consider the tax implications of doing so. And bear in mind that taking money out of your pension in your 50s could reduce the amount you have to live on when you officially retire.
Frequently asked questions
Yes, it’s possible to take money out of private pensions and most workplace pensions from the age of 55, and to continue to work either full-time or part-time. Bear in mind that, after you’ve taken out your 25% tax-free lump sum, anything above this is subject to income tax. So if your earnings from employment already put you close to a higher income tax bracket, anything extra you take from your pension might nudge you over the boundary.
Potentially, but the rules are a bit complicated and depend on which section of the NHS pension scheme you’re part of. There are some videos and guides on the NHS Business Services Authority website, but if in doubt, ask your employer directly.
No. You’re under no legal obligation to retire once you start taking your private pension.
Almost certainly not. Following changes to the rules in 2011, employers can no longer force employees to retire at age 65 (the former default retirement age). In some cases, an employer may be able to force you to retire by law, but they must give a good reason. These may include if your job requires you to have a certain level of mental or physical ability, or has an age limit set by another law.
All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest. Past performance is no guarantee of future results. If you’re not sure which investments are right for you, please seek out a financial adviser. Capital at risk.
Ceri Stanaway is a researcher, writer and editor with more than 15 years’ experience, including a long stint at independent publisher Which?. She’s helped people find the best products and services, and avoid the pitfalls, across topics ranging from broadband to insurance. Outside of work, you can often find her sampling the fares in local cafes.
Use our simple guide to understand how much state pension to expect, how it’s calculated and if you can boost it.
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