Can you withdraw money from a private pension?

You generally can’t withdraw money from your pension until you reach retirement age, which is currently 55 for personal pensions. 

Pension Scheme Types

Retirement Options

We traditionally refer to taking your pension and finishing your working life as ‘retirement’. However, due to the increases 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.

When can I access my pension?

If you’re eligible, you can claim your State Pension at 66 (for 2020/21). You can find more information in the State Pension section about how to find out how much you’ll receive and when you’re forecasted to receive it.

Most private personal pensions (including defined contribution workplace pensions) can be accessed from age 55 (expected to increase by 57 by 2028). Some defined benefit workplace pensions may have set retirement ages specific to the arrangements for that scheme, so it’s best to check any paperwork you have, or call your pension provider to find out. 

You may have set a retirement age on any personal pensions you have, when you set them up. This will help your pension provider know when to contact you about your options for retirement. There may also be some implications for the types of funds you’re invested in and the strategy they have so it’s worth reminding yourself of your set retirement age and your fund selections to ensure these still match your retirement plans.

What are my retirement options?

Once you reach 55, there are a number of options available to you. 

Firstly, you can leave your pot invested if you’re not ready to start take any income from your pension. You can also continue to pay into your pension. There are limits, however, if you do decide to take any income from one or more of your personal pensions. This is dependent on the type of policy, and how you withdraw the money. 

It could be worth seeking some financial advice if you wish to carry on paying in, after receiving a payment from any other pension arrangements you have.  

There are four different ways you can access your pension savings. You’re able to withdraw the first 25% of your pot without paying tax on it. The remaining 75% is taxable, but whether you pay tax and how much you pay depends on your specific circumstances. You may decide to take your full pot as a lump sum, take smaller chunks as and when you need it, withdraw a regular amount or set up an annuity to pay you a fixed income for life. 

We recommend that you speak with Pension Wise (part of the Money and Pensions Service) to help you understand the tax implications of your options as well as any impact they may have on your entitlement to any state benefits you might be eligible for. You can book an appointment once you are aged 50 or over and meet with someone face-to-face or speak to them on the phone. For more information, visit pensionwise.gov.uk or call 0800 138 3944. 

You may also wish to speak to a financial adviser who can offer you tailored advice after reviewing your finances and recommend the best way to plan for your retirement. You can find one in your local area at unbiased.co.uk. Advisers usually charge for their services. 

Taking your full pot

You are able to withdraw your full pension savings as a cash lump sum. However, there could be tax implications depending on the size of the pension pot.

You’ll get the first 25% as a tax-free lump sum, but you’ll need to pay tax on the remaining 75% as it will count towards your annual income. It could also move you into the upper income tax band. Emergency tax may also be deducted from your payment, but you should be able to claim this back from HMRC.

Taking smaller lump sums

You can leave your money invested and withdraw it as cash lump sums as and when you wish. 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 is left invested and so it has the chance to grow but there is a risk it could go down in value also. If you choose this option, you may wish to spread your withdrawals over different tax years to minimise the tax you pay.

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. All payments apart from your tax-free cash will be subject to income tax. You can change or stop the amount you’re taking at any time. 

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

Annuity

An annuity provides a guaranteed regular income which will pay out either for a fixed time 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.

What happens if I need to retire early?

You can decide to retire, whenever suits your personal circumstances. However, you won’t be able to claim your workplace or personal pensions until you’re 55. Likewise, you won’t be able to access your state pension until you reach your specified State Pension age. You’ll need to consider if how much State Pension you’ll receive, and whether you’ve saved enough into any private pension and how you’ll fund your lifestyle until you receive any pension income. 

Pension scams

Offering early pension release is a common ruse used by scammers and you should be wary of anyone who claims they can help you do this. You could risk losing all of your pension as well as incurring fines from HMRC.

If you’re worried you’ve been approached about an early pension release scam you should report it to the Financial Conduct Authority by calling their consumer helpline on 0800 111 6768 or by visiting FCA.org.

Ill health

You may be able to access your pension early if you’re seriously ill. There are some strict conditions you need to meet and confirm to HMRC:

Ill health retirement is sometimes also referred to as being ‘medically retired’ and is when your pension scheme allows you to draw your pension before the age of 55 because of sickness, disability or a serious medical condition. It generally means you can no longer continue working at your normal job or it impacts the amount of money you could earn. There may be specific terms set out by your pension scheme regarding what conditions would entitle you to draw your pension early. If you want to request ill-health retirement, you’ll likely have to provide evidence and you may be restricted on which retirement options you can choose.

Serious ill-health

You can also claim your pension early under Serious Ill Health rules. If you’ve been diagnosed with a condition and your life expectancy is less than one year you may be able to take the whole of your pension pot early as a tax-free lump sum (defined contribution schemes). Again, evidence will be required from your provider.

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