Taking money from your pension

Here's the lowdown on when you can access the money in your pension pot, and how pension freedoms work.

When you first start saving into a pension, retirement might seem a long time away. But as it draws closer, your attention will turn less to putting money in to your pension, and more to how to get your money out. Whether you’re wondering about the state pension, a workplace pension, or a personal pension, we explain when and how you can get your hands on your pension savings.

When can I start taking money from my personal or workplace pension?

The earliest you can usually start taking money from your personal or workplace pension without incurring heavy tax penalties is age 55. This is due to rise to age 57 from 2028.

You don’t have to start taking your pension at age 55, though. Many people choose to wait until a more traditional retirement age of 60 or 65 – or even later.

Are there different rules for workplace pensions, personal pensions and SIPPs?

Yes and no. If you have a defined contribution (DC) pension, you can typically access the money in your pot whenever you like from age 55. Defined contribution pensions include personal pensions, self invested personal pensions (SIPPs), and some workplace pensions.

However, if you have a defined benefit workplace pension, the default age for starting to receive this income is usually a bit higher. Defined benefit pensions pay you an income based on a proportion of your salary while you were working for the company. The scheme might set your default retirement age at 60 or 65, for example.

You may be able to change this default so you can start taking income earlier, but your monthly payments will be reduced as you’ll likely be receiving income for a longer time. Of course, you can also choose to start taking your defined benefit pension later than the default age, which may give you a higher income.

Can I ever take money from my personal or workplace pension before age 55?

There are only a couple of circumstances in which you might be able to take money from your pension before the age of 55 without incurring eye-watering tax penalties.

  1. If you joined your pension scheme before 6 April 2006 and the scheme allows an earlier retirement date. This usually applies to professions where careers tend to end at a younger age, such as professional sport.
  2. If you have poor health or a serious medical condition that means you need to retire early. If serious illness means that you’re expected to live less than a year, you may be able to withdraw your full pension as a tax-free lump sum. Some pension providers require a doctor or registered practitioner to confirm your medical status.

What happens if I take money from a personal or workplace pension too early?

It’s not illegal to take money out of your pension before the age of 55 (or 57 from 2028). But if you do, and no special circumstances apply, HMRC is likely to regard any withdrawal as an unauthorised transfer. If so, you’ll be charged up to 55% tax on the amount you take out.

Reputable pension providers are unlikely to support this, which means you’ll probably need to use an unregulated third party. While they may describe what they’re doing in appealing terms such as “pension liberation”, in practice many such firms are little more than scammers that will charge you a high fee on top of the tax bill you’ll face. Plus, with many pension liberation scams, the investments that your money is placed in are likely to be fraudulent.

Are there any pension scams I should be aware of when trying to take money from my pension?

Zoe Stabler

Finder expert Zoe Stabler answers

Sadly, fraudsters won’t think twice about trying to part you from the savings you’re relying on to fund your retirement. They see the money held in pension pots as rich pickings. After all, if you’ve been saving into a pension your whole life, your pot could be one of your biggest assets.

Scammers may try their luck at any point and try to trick you into transferring your pension into high-risk and probably bogus schemes. But one of the times to be most aware is in the run-up to age 55. So-called “pension liberation” scams are when fraudsters try to persuade those approaching retirement to access their funds before the rules allow. They may contact you via a cold call or an email. Some may even go as far as setting up bogus websites that you might come across while researching your legitimate options to access your pension.

The fraudster will indicate that they know of legal loopholes that will allow you to circumvent the usual rules about unauthorised pension transfers. They’ll claim that these let you access your funds early without having to pay HMRC’s high tax bill. In exchange for a fee, of course.

They’re lying. The legal loopholes don’t exist. As soon as HMRC finds out about the unauthorised transfer, it will hit you with a 55% tax bill.

So, if anyone contacts you out of the blue offering to help you “liberate” your pension before you reach the age of 55, it’s almost certainly a scam.

When do I start getting my state pension?

The age at which you can start receiving the state pension is later than you can access any personal or workplace pension. Your state pension age depends on when you were born.

Currently, the age is 66, although this is due to rise to 67 between 2026 and 2028. Eventually, it will rise to 68, but the timeline for this has not yet been confirmed.

You can check your state pension age based on your specific birth date using the government’s state pension calculator. The income you eventually receive depends on a number of things, including when you joined the scheme and your National Insurance contribution record.

Is it possible to take my state pension early?

We’re afraid not. Unlike personal and workplace pensions, there are no special circumstances (such as ill health) that might entitle you to receive your state pension before your official state pension age.

Can I delay taking my state pension?

You can indeed. While it might seem crazy to delay receiving income that you’re entitled to, there can be benefits to doing so.

Firstly, if you’re already receiving decent income from other sources – such as employment or other pensions – there’s a risk that taking the state pension will push you into a higher tax bracket. If you delay taking it until your income from other sources goes down, this could help keep your tax bill lower.

Secondly, deferring your state pension could increase the payments you get when you decide to claim it. For every year you defer, you’ll get an increase in state pension income of 5.8%.

You don’t have to do anything to defer the state pension. It will automatically be deferred until you actively claim it.

Do I have to take my pension as soon as I retire?

No. If you have enough income from other sources, such as savings or income from renting out a property, you don’t have to take your pension when you retire from work. In most cases, you won’t start automatically receiving a pension, so you won’t need to do anything to delay access. There may be an exception to this rule with some defined benefit workplace pensions, which might automatically start paying out when you reach a certain age. If this is the case, you’ll need to proactively request a delay.

What are the pension freedom rules?

The term “pension freedom” is the term commonly used for rules that came into force in April 2015. These rules dramatically changed the way in which defined contribution (DC) pensions can be accessed. Previously, most people with this type of pension had little choice but to buy an annuity with their pension savings.

Since 2015, you can access the funds in your DC pension pot in a number of ways, as we outline below, and choose when to do so from the age of 55 (or 57, from 2028). These changes became widely known as “pension freedoms”, because they freed up pension-holders’ choices of how to access their money.

How can I take money from my pension?

That depends on the type of pension you have. Some are more straightforward than others – here’s a quick summary of how different types of pension usually work.

How can I take money from the state pension?

Once you claim your state pension, you will receive it as regular income into your bank account – usually every 4 weeks. Find out more about the state pension, including how much you’re likely to receive, in our full state pension guide.

How can I take money from a defined benefit workplace pension?

Like the state pension, defined benefit pensions pay out a fixed, regular income when you retire, directly into your bank account. How much you’ll get is based on a proportion of your salary when you were at the company, and is calculated based on the years you’ve worked at a company.

Under pension freedom rules, you can usually take part of a defined benefit pension as a tax-free lump sum at any point from the age of 55. You’ll need to ask your provider how much you can take, as rules can vary depending on the scheme. And bear in mind that taking this chunk out of your pension pot will reduce your annual income.

How can I take money from a defined contribution pension?

This is where your choices get a bit more elaborate, as the pension freedom rules opened up your choices of how to access defined contribution pension pots.

You can:

  • Withdraw 25% of your pension pot (excluding the state pension) as a tax-free cash lump sum.
  • Buy an annuity. This is where you use some or all of your pension to take out a form of insurance product that gives you a guaranteed income for the rest of your life (or for a fixed term, depending on the product). How much you’ll get varies between providers, so if you want an annuity, it’s worth shopping around.
  • Leave most of the money invested and take a regular income, known as pension income drawdown. You can take out as much or as little income as you want.
  • Take the whole pot out and do with it as you wish. However, you should think carefully before doing this unless the pot is fairly small. Anything you take out above the 25% tax-free lump sum will be taxable. This could make for a higher tax bill than if you took out money more gradually.
  • Withdraw lump sums as and when you need them, leaving the rest invested. If you choose this option, rather than withdrawing 25% as a single tax-free lump sum, the first 25% of each smaller lump sum you withdraw will be tax-free. This option is also known as UFPLS (Uncrystallised Funds Pension Lump Sum).

You can mix and match more than one of these options if you like. For example, you could take the 25% tax free lump sum, buy an annuity with half of what’s left, and leave the rest in an income drawdown account to take out when you need it.

Other than the tax-free lump sum, you pay income tax on pension income at the relevant rate, based on how much you withdraw over the year and any income from other sources.

Bottom line

The 2015 pension freedom rules have given us all more choice about how and when to access our pension savings. But they have also placed more responsibility on us to make wise decisions – especially in relation to defined contribution pensions. It’s well worth starting to think about your options, and how much you might need to live on in retirement, well before you reach age 55. If you need a bit of support, from the age of 50 everyone in the UK with a defined contribution pension is entitled to a free appointment with government service Pension Wise. It will help you understand what your overall financial situation will be when you retire, and talk you through your options to help you make a decision.

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