As you approach retirement, it's natural to start thinking about claiming your pension. You've probably been paying in for a while, but how do you actually access your private pension savings?
In this article, we'll look at what you need to know when you're ready to withdraw your pension.
Before you start to think about accessing your pension, you'll want to make sure it's the right time.
We traditionally refer to taking your pension and finishing your working life as ‘retirement’. However, due to the increase in the State pension age and people having wider and more varied careers, when and how you withdraw money from your pension has changed considerably.
The answer to whether you can withdraw your pension depends on:
The first factor affecting when you can withdraw your pension is your age.
Generally, you'll need to wait until you're 55 to access your private pension - this includes most defined contribution workplace pensions.
You won't be able to access your State pension until you reach State pension age - currently 66. Remember, the UK retirement age is set to rise for future generations.
Once you reach 55, you can choose how you'd like to access your pension.
There are 4 main ways you can access your pension savings:
Remember, you can withdraw the first 25% of your pot tax-free. The remaining 75% is taxable, but whether you pay tax and how much you pay depends on your specific circumstances.
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 Money Helper (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.
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Once you've decided how you'd like to use your pension savings, it's important to be ready in case your situation changes. Here are 3 more things to keep in mind when cashing in your pension.
As mentioned above, it's likely you'll need to pay income tax on withdrawals from your pension pot.
To make sure you don't pay more tax than necessary, try to work out a rough estimate of how much you'll need to fund your lifestyle in retirement. By only withdrawing what you need as a lump sum, you'll avoid paying income tax on money you could've left invested.
If you leave a portion (or all) of your pension invested when you retire, don't forget you'll still be affected by the market. Depending on the exact makeup of your pension fund, your investments may rise or fall - potentially impacting how much you can take out in the future.
It's crucial to remember that the value of your pot can go down, as well as up.
Of course, the worst thing that can happen to our pension is running out of money. We tend to underestimate the amount of time we'll spend in retirement - and this can lead to drawing too much too early.
The best way to counteract this is to regularly review your pot. How much is left? Is this enough to fund your life for the next 5, 10 or 20 years? Remember, you can pass your pot on to loved ones after you pass away.
If in doubt, it's always best to speak to a financial adviser.
Under certain circumstances, it is possible to withdraw your pension early. However, this can end up being costly.
It isn't against the law to withdraw from your pot before your retirement age but you may pay up to 55% tax on your withdrawals.
For more detail, check out our article on early pension withdrawal.
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