How to withdraw from your pension fund

Find out the four ways to withdraw from your pension fund, the tax implications, claiming the State pension and more.

Once you reach 55, you'll be able to start cashing in most private or workplace pensions. In this article, we explain your retirement options and how to withdraw from your pension.

Pension fund withdrawal

Once you've reached the retirement age for your pension, you have 4 ways to access your savings:

  1. withdrawing your full pension pot
  2. withdrawing from your pot in smaller lump sums
  3. flexible drawdown
  4. an annuity

There's also a fifth option. If you don't need to take an income from your pension, you can always leave your pot invested. You can also continue to pay into your pension - however, there are limits if you continue paying into one pension while making withdrawals from another.

We recommend that you speak with Pension Wise (part of the Money and Pensions Service) to help you understand the tax implications of accessing your pension, as well as any impact on State benefits. You can book an appointment as soon as you are aged 50 or over and meet with someone face-to-face or speak to them on the phone.

You may also wish to speak to a financial adviser who can help you plan your retirement. You can find one in your local area over at Unbiased. Advisers usually charge for their services.

1. Taking your full pot

One of the more straightforward ways to access your pension savings is by withdrawing your pot as one big cash lump sum. However, depending on the size of your pot, you may have to pay a lot back in income tax.

You’ll get the first 25% as a tax-free lump sum, but you will need to pay tax on the remaining 75% as part of your annual income. This may move you into the higher or additional rate tax band.

You may also have to pay emergency tax on your payment, but you should be able to claim this back from HMRC. For more on how this works, check out our article on pensions and tax.

2. Taking smaller lump sums

You can also leave your money invested and withdraw smaller cash lump sums as and when you like. Again, the first 25% of each amount you take will usually be tax-free, but the rest may be taxed as income, depending on your circumstances.

The remainder of your pension pot will be left invested and therefore has the chance to grow - but there is also a risk it could go down in value. If you choose this option, you may wish to spread your withdrawals over different tax years to minimise the tax you pay.

Withdrawing your full pension pot at once isn't very tax efficient.

3. Drawdown

Income drawdown (sometimes called pension drawdown) is where you leave your pension invested and take regular payments from your pot over time. With drawdown, you can usually take up to 25% of your pension pot as tax-free cash and leave the rest invested to provide a regular income and occasional lump sums if required.

Apart from your initial tax-free cash, every withdrawal you make will be subject to income tax. You can change or stop the amount you’re taking at any time.

Remember, if your pension pot remains invested, it has the chance to grow but could go down in value too. If you withdraw too much or your pension fund doesn't perform as well as you’d expected, you could run out of money to fund your retirement. 

4. Annuity

An annuity provides a guaranteed regular income that pays out for a fixed period or until you die. You can take up to 25% of your pension pot as tax-free cash and use the rest to buy the annuity. There are a number of features you can include, such as requesting that payments increase in line with inflation or arranging for payments to continue to your dependents after your death.

Smokers and those in poor health may be able to get a better income due to a shorter life expectancy. The income payments you receive will be subject to tax.

Pension withdrawal tax

Another thing to consider when cashing in your pension is tax. While 25% of your pot can be taken out tax-free, the remaining 75% can be taxed as income. The actual tax payable on pension fund withdrawals depends on the size of your pot and how much you take out each year. To learn more, check out our article paying tax on your pension.

How to claim your State pension

In addition to any workplace or private pensions you have, you may also be able to claim the State pension. You'll be able to access this when you reach State pension age - currently set at 66. You should receive a letter from the government in advance letting you know when you're close. You'll then need to apply online, or get in touch with the Pension Service to start receiving your payments.

Just remember, you'll need to meet certain qualifying criteria to be eligible for even a minimum State pension. More on that on our guide to the State pension.

Can I take my pension at 55 and still work?

Despite common belief, there is no requirement for you to stop working before accessing your pension. As long as you meet the required age, you can keep working and withdraw from your pension in any of the ways outlined above.

Many people like to use their pension to fund a 'semi-retirement' - allowing them to reduce their working hours or even change jobs. The important thing to know here is taking income from your pension on top of your earnings from your job may mean you'll owe more in income tax.

Get started in 5 minutes

1. Get a Penfold account by registering your details online or with our app.

2. Transfer an existing pension, or make a one-off or recurring payment (pause or adjust any time).

Done! Check savings progress, change investment plan and more with our app or online dashboard.

Get started now