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Withdrawing a pension.

When and how you can withdraw from a pension will depend on the type of pension you have, your personal circumstances and your retirement goals.

When can I withdraw from my pension?

You’re generally able to take your benefits from a personal or workplace pension from the age of 55 onwards. However, it may depend on the rules of your specific pension scheme.

In most cases, you’re able to withdraw from personal and workplace pensions well before you’re able to take your state pension. You can only start taking your state pension once you reach state pension age.

Can I take my pension at 55 and still work?

Usually, you can choose to take your pension at 55 and still work. There are many different reasons why you might choose to begin taking some money from your pension, or all of your pension, at 55. Some people choose to keep working, but use their pension to supplement their salary. Others may want to begin to reduce their working hours or even retire early. It all depends on what fits best with your personal circumstances.

How do I withdraw my pension?

If you reach 55, or the age at which you qualify to withdraw money from your specific pension scheme, and decide you would like to take money out of your pension there are a few things to consider. How you withdraw your pension will depend on your personal circumstances and your retirement goals, and whether it’s a defined contribution pension or a defined benefit pension.

You don’t have to do anything with your pension pot unless you want to. You could choose to leave the investments where they are and continue to get tax relief up to the age of 75, or take the money out at a time that suits you best.

Withdrawing from a defined contribution pension

If you have a defined contribution pension, you have a few options for how you can use the money in your pot. You can combine or use the different options to suit you and your retirement goals and needs.

If you begin to take money from your pension, you’re able to take the first 25% of your pension tax free, and you then pay income tax on the remaining 75%. You can either take the 25% tax-free amount as a cash lump sum, or in small chunks, depending on what you want to do with the rest of your pension. How you decide to take your tax-free amount, will determine if it is a one-off or per tax year.

When you start to take money from your pension, you could choose to: have flexible-access drawdown, buy an annuity, take small lump sums as cash, take the whole pension as cash, or combine one or more of these options.

  • Flexible-access drawdown

Flexible-access drawdown allows you to have control over your pension income and to make withdrawals as and when you need to. With this option, you can take up to 25% of your pension tax-free, for example as a cash lump sum, and then reinvest the remaining amount of your pension. You can choose to reinvest your pension in funds that suit your retirement objectives, attitude to risk, and amount of income that you want.

While it doesn’t offer the option of a guaranteed income, flexible-access drawdown can be used to provide a regular adjustable income. But remember, any income or further withdrawals over the original tax-free 25% are taxable at your rate of income tax. There may also be a number of associated fees and charges associated with drawdown that you need to be aware of. As with all investing, the value of your investments could go down as well as up, and you may get back less than you put in.

Nutmeg offers drawdown in partnership with our pension administrator Hornbuckle. If you hold a personal pension with Nutmeg and you’re approaching 55, you’ll receive an information pack explaining all the details and showing you how to set up a drawdown if you want one.

  • An annuity

An annuity is a guaranteed income for life, or for a specified period of time. If you buy an annuity, you will receive up to 25% of your pension tax-free, and then the rest of your pot will be used to provide you with a regular income. The amount you get will depend on a number of factors including the size of your pension pot, your age, your gender and some health considerations, for example if you are a smoker. The income you receive is taxable.

An annuity can provide income security as you know exactly what you’ll be getting. You can also choose to provide income for a beneficiary or dependent when you die. There are many different types of annuity with different associated charges, so it’s important that you shop around for the deal that best suits your personal needs and circumstances.

  • Smaller lump sums as cash

You could choose to leave your pension pot where it is, to continue to grow tax-free, and to take out smaller cash amounts as and when you need. For each withdrawal, the first 25% is tax-free and the rest would count as income for tax purposes. In the industry, this is known as uncrystallised funds pension lump sums.

  • Take the whole pension as cash

You’re able to take everything in your pension pot as cash all at once. This option requires you to close your whole pension. Generally, the first 25% will be tax free and the remaining will taxed according to your income band and tax rate. It’s important to know that if you decide on this option you could end up paying a lot of tax and could potentially, depending on what you do with the money, not have a regular income for later in life.

  • Combine the options

What’s great about the flexible pension rules is that you don’t have to just choose one way to take your pension. You can decide to use a combination of the options available and to take money as and when it suits your particular circumstances. For example, you could move money from your pension gradually into a flexible-access drawdown, taking 25% of the money you move each time tax-free.

It’s generally possible to continue contributing to your defined contribution pension after you’ve started to access it and used the 25% tax-free allowance. However, you’ll only be able to make contributions up to a reduced annual allowance, known as the Money Purchase Annual Allowance. The Money Purchase Annual Allowance is currently £10,000.

Any decisions you make about how you take your pension need to take into account the size of your pension pot, how long you want it to last, how much income you want to take, what other savings or income you have, the amount of tax you pay, any financial dependents you might have, what your personal circumstances are and when you want to stop working. There may be fees and charges associated with any decisions you make, so you should get as much information as you can about your options before you act.

It’s generally a good idea to speak to a financial adviser before you make any decisions about when and how you take money from your pension.

Withdrawing from a defined benefit pension

The rules of your specific defined benefit pension scheme will determine when and how you can withdraw your pension. Often these schemes run until you reach the age of 65 – at which point your employer stops paying pension contributions and your pension starts to be paid out to you.

Some defined benefit schemes may allow you to start to take from your pension at 55. However, this may impact the amount that you get over the long term. Others may allow you to defer taking your pension, with the possibility of getting a higher income at the point you do take it.

It’s important to check the specific details of your scheme, and get regulated financial advice, before making any decisions about withdrawing from a defined benefit pension.

Withdrawing from my state pension

You have to wait until you reach your state pension age before you can start to claim your state pension. You can’t withdraw a lump sum from your state pension, but you will get a monthly payment based on your national insurance contributions record.

Tax and the cash lump sum

When you start taking benefits from your pension, you can usually choose to take a portion of your benefits as a tax-free cash lump sum. Your tax-free amount doesn’t impact on your annual personal allowance, which is – the amount of income you don’t have to pay tax on each year. The personal allowance for the 2024/25 tax year is currently £12,570.

If you have a defined benefit pension scheme, the scheme’s rules will determine how much you can take as a tax-free cash lump sum, and by how much your subsequent income will be reduced by.

You will have to pay tax on the remaining benefits in your pension. The amount of tax you pay will depend on your total income for the year and your tax rate.

There are a number of pros and cons to deciding to take the cash lump sum and these will depend on your personal circumstances. Be sure to get regulated financial advice regarding your options before making any decision on how and when to take your pension.

Tax treatment depends on your individual circumstances and may change in the future.

Can I take money out of my pension early?

In certain specific circumstances you may be able to access your pension early. However, this will also depend on the rules of your specific pension scheme. There are generally only two situations where schemes may allow you to take money early:

  • if you’re terminally ill or have retired early due to serious illness
  • if you have a specified ‘protected retirement date’ in your pension. Certain schemes cater for people in occupations where retirement is likely to happen earlier, for example for professional sports people.

If you want to withdraw your pension early, and meet the specific early release criteria, you should contact your pension provider directly.

Pension release

Many companies offer a pension release or pension unlocking service. They offer to help you take money out of your pension before you turn 55. It’s very important to know that if you release your pension in this way you will likely end up with a very large tax bill and could stand to lose a lot of money. Find out more about pension release companies and some of the scams associated with these.

Pension release is not illegal. However, unless you meet the specific criteria for getting your pension early, you could end up:

  • paying the pension release company substantial charges
  • paying 55% tax on the money as it will be seen by HMRC as an unauthorised payment
  • potentially losing out on a very large percentage of the money you could’ve taken out of your pension in the future.

You should always get regulated financial advice if you’re considering taking your pension early.

As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. A pension may not be right for everyone and tax rules may change in the future. If you are unsure if a pension is right for you, please seek financial advice. Please note that during any transfer, your investments will be out of the market.

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