What age can you withdraw your pension, and is there any way you can withdraw it early? We look at what the current rules are
Saving money into a pension is one of the most tax-efficient things you can do with any spare cash – there’s just one problem. What if you need that money before retirement age?
We explain the rules surrounding accessing your pension money, as well as the benefits and dangers of dipping into your retirement sagings.
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When can I withdraw my pension?
You can currently withdraw a private pension at the age of 55, although this is rising to 57 in 2028 and might rise again in the future.
If you have a pension based on your salary then you will have a “normal pension age” – typically 60 or 65 – in your pension terms and conditions, although you can access it earlier if needed.
You can apply for a state pension payment – and this is an active process and not automatic – from the age of 66 currently.
Withdrawing your state pension
Contrary to popular belief, people do not have state pension savings in the UK. The state pension is technically a “qualified benefit”, that is to say it’s something you get paid by the state, based on meeting certain criteria.
There’s no specific fund people pay into that belongs to them, instead you make national insurance contributions – with the money paid into this going on the NHS, state pensions, unemployment payments as well as sickness and bereavement payments.
That means, to claim it you need to meet the qualifying conditions. These are:
- At least 10 qualifying years when you’ve received a national insurance credit
- Reached state pension age
State pension age in the UK is currently 66, although that is rising to 68 over the next few years. You can check you personal state pension age here.
Once you reach that age, you should be sent a letter inviting you to start claiming. Follow the instructions on that to start being paid. If you haven’t got the letter, or lose it, you can request an invitation code here.
And don’t worry too much about being late to claim, you can receive any missed payments you’re owed as a lump sum or as an increased monthly payment for life if you delay.
Withdrawing your private or workplace pension
You can access your private or workplace pension from the age of 55 at the moment. However, that age is rising to 57 on April 6, 2028.
If you you have a pension based on your salary – known as “defined benefit” pension – you might also need your employer’s or the pension scheme’s permission to retire before your normal pension age even if you are over 55.
There are only two exceptions to this rule
- Serious ill health – generally meaning you have a terminal illness and less than a year to live
- If you have a “protected retirement age” – this is for certain professions and has to have been agreed before April 6, 2006 to be valid
How can I withdraw my pension early?
Early pension release isn’t technically illegal in the UK, but it comes with massive penalties.
Unless you meet one of the conditions above – ie you’re terminally ill or have a pre-arranged protected retirement age – you’ll be slapped with a 55% tax penalty for money withdrawn.
Most pension providers simply won’t let you do this – although a court case has established your right to access your money if you really want to.
Anyone promising to use “loopholes” to get you early pension access is likely a scammer.
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Can I take some of my pension early and leave the rest for later?
Yes. Once you’ve hit 55 (rising to 57 in 2028) you can take up to 25% of your pension out tax-free.
In fact, it’s a popular choice, with around four people in five accessing some of their money as a tax-free lump sum while still working.
You don’t have to stop at 25% either, once you are of age, you can use your pension savings for anything you like – although all money over 25% is taxed in the same way it would be if you had earned it as part of your job.
However, there are two important things to consider before you make a move to pull money from your pension.
Firstly, once you start taking money out of your pension, the amount you can save tax-free is dramatically cut. Instead of being able to save up to £60,000 a year tax free, you can only save £10,000 before tax is applied.
Secondly, you’re reducing the amount of money you have to live on in retirement.
Can I delay taking my pension and continue working?
Absolutely – and you can do this with the state pension as well as a private pension.
In fact, for every year you delay taking your pension you can increase the amount you have for the rest of your retirement.
But choose carefully.
With the state pension, you’d have to live into your 80s in most cases before the extra cash you get paid for delaying outweighs the money you would have received in that first year.
With a private pension, if your money is simply in a pension fund, then delaying accessing doesn’t affect the retirement pot at all – except giving it an extra year to grow.
However, if you’re converting it to an annuity – where you receive a regular payment for life – be aware annuity payouts are based on three things.
- Your age
- Your health
- Gilt rates and other market conditions
While delaying might mean the first two of these result in a higher payout, if the Gilt markets change you could still be offered a lower annual payment as a result of delaying.
Will I get less if I take my pension early?
In most cases you won’t get less overall for accessing your pension early – but what you have will be split over a longer time.
That means you’ll get less each year, but receive that money over more years.
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Are there any disadvantages to withdrawing a pension early?
In the case of the state pension, accessing it as soon as possible has very few disadvantages. You might get a higher payout for delaying, but it will take at least 15 years to make up the difference and in the meantime that cash could be earning you interest.
It might possibly be worth waiting if you are currently working and are planning to stop – as you could move into a lower tax band afterwards.
With a private pension tied to your salary, you’ll get a lower amount for life as a result of accessing the pension before your stated “normal pension age”, but there should be no other downsides.
With a workplace or private pension that results in a pot of money, rather than a fixed payout, then the consequence is that there’s less money in the pot to fund your retirement.
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Are there any pension scams for withdrawing a pension early?
Sadly, this is an area where scammers frequently operate.
It’s almost unheard of for a reputable firm to offer access to a pension before the age of 55 (rising to 57 from 2028) – that means anyone offering you that option is, by definition, unreputable.
Treat any offer to access your pension early with extreme caution. In the very best possible cases you’ll lose 55% of your money to tax, in the worst cases you could lose all of it.
Do I pay tax on pension withdrawals?
Yes. You get a one-off, tax-free lump sum, but after that money withdrawn from a pension fund counts as income.
On top of that, all money paid out by the state pension is also taxed as income.
This is a particular problem if you’re planning on making a big withdrawal in a single year.
For example, if you cashed in your entire £100,000 pension fund at the age of 55, you would get £25,000 tax free, while the remaining £75,000 would be added to any other income you had that year.
In the best-case scenario, that would see you lose more than £20,000 of it to tax. In the worst case scenario you could lose almost £34,000 of it to tax.
If you had already taken your tax-free lump sum and pulled another £100,000 out in a single year you would lose between £32,000 and £45,000 of that money to tax.
Should I withdraw my pension early?
Taking up to 25% of your retirement savings tax-free can provide a useful lump sum to kick-start your retirement or pay off any outstanding debts – for example to clear a mortgage or pay for needed renovations to a home.
In fact, if you’re a higher-rate taxpayer, it could even be the efficient thing to do – as removing the money up front could mean less tax overall.
However, be aware that money you take out early is money you won’t have for the rest of your retirement.
Cashing in a pension to have a new kitchen might feel like a great idea at 55, but ask yourself if 80-year-old you would rather have more money each month to live on.
