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\u2019re considering, read on to find out more about the plus and minus points of mixing and matching pension and employment income.<\/p>
The earliest you can usually take money out of a private pension<\/a> \u2013 also known as a personal pension \u2013 is age 55. This age is due to rise to 57 from 2028. If you take out money before this age, you\u2019ll incur a very high tax charge for an \u201cunauthorised\u201d withdrawal.<\/p> Private pensions are pensions that you set up yourself, as opposed to workplace pensions that are arranged by your employer, or the State Pension<\/a>.<\/p> 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) \u2013 though you may be able to change this default.<\/p> You\u2019ll 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.<\/p> 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.<\/p> 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.<\/p> 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.<\/p> 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.<\/p> No matter when you withdraw this lump sum, there\u2019s nothing stopping you from continuing to work thereafter. And, because the lump sum is tax-free, it won\u2019t push your employment earnings into a higher income tax bracket.<\/p> Yes, you can. There are 2 main ways of taking an income from a private, defined contribution pension:<\/p> 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.<\/p> 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\u2019t start drawing an income until after a more traditional pension age (65, say), continuing to work part-time means you\u2019ll be able to take a smaller pension income. This will help your pension savings last longer.<\/p> There\u2019s 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.<\/p> It\u2019s 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.<\/p> If you\u2019re self-employed and continue to work, you\u2019ll need to continue to complete a Self Assessment tax return as normal and declare pension income on this.<\/p> Yes, if you want to. If you\u2019re 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\u2019ll 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.<\/p> 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.<\/p> If the only money you take from your pension is your 25% tax-free lump sum, this won\u2019t affect your income tax on other earnings at all.<\/p> 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.<\/p> Let\u2019s say you\u2019re 54 and currently working in a job that pays you a net income of \u00a345,000 a year. This makes you a basic-rate taxpayer. You\u2019ll pay 20% income tax on the income above your annual Personal Allowance. For the 2024\/25 tax year, the Personal Allowance is \u00a312,570. This means you\u2019ll pay 20% basic-rate income tax on \u00a332,430 of your income, equating to a tax bill of \u00a36,486.<\/p> 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 \u00a310,000 a year from your pension.<\/p> This would push your total income for the year to \u00a355,000. As the upper threshold for basic-rate tax is \u00a350,270, this would push some of your income into the higher-rate income tax band of 40%. So you\u2019d pay:<\/p> If you were to reduce the amount you withdrew from your pension pot to \u00a35,000 rather than \u00a310,000 a year, this would keep you within the basic-rate income tax band. If you\u2019re able to afford to hold off on taking out that extra \u00a35,000 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 \u00a3946 a year in income tax.<\/p>Am I able to take money out of my private pension while still working?<\/h3>
Can I take my tax-free pension lump sum and still work?<\/h3>
Can I take a monthly income from my private pension and still work?<\/h3>
How can I still work while withdrawing from my private pension?<\/h3>
Do I have to tell anyone about working and withdrawing from my private pension at the same time?<\/h3>
Can I carry on working after I start receiving my state pension?<\/h3>
How much tax will I need to pay if I am still working when I start drawing a pension?<\/h3>
Worked example: How working and drawing a pension income can affect your income tax payments<\/h4>