When can I withdraw my pension?

For most private pensions, including a personal pension or Self Invested Personal Pension (SIPP), the earliest you can usually take money from your pension is age 55 (rising to 57 from April 2028). This is often referred to as ‘minimum pension age’.

Many schemes also set a “normal” retirement age within their pension scheme rules. But in most cases, you have flexibility to access funds earlier or later.

From April 2028, the minimum age increases to 57. If you are 55 or 56 at that point, you may temporarily lose access unless you have already started withdrawals – for example, through drawdown or an annuity.

While it’s technically possible to withdraw your entire pension pot in one go, this is rarely the best approach for most people.

Can I withdraw my pension before the minimum pension age?

In almost all cases, the answer is no. There are very limited exceptions, such as serious ill health or terminal illness. Outside these circumstances, accessing your pension early is treated by HMRC as an unauthorised payment – meaning you could face a tax charge of up to 55%. 

Be extremely cautious of companies offering to ‘unlock’ your pension early. These are often scams. If you receive unsolicited contact suggesting early access, do not engage. You could lose your savings and have to pay tax. Reputable pension companies will not release funds early even if you are willing to accept the tax penalty.

Why taking everything at once can be a mistake

Recent FCA data shows many people choose to fully withdraw their pension when they first access it. In most cases, these are smaller pots – often under £10,000 – perhaps linked to workplace pensions built up over short periods.

For smaller amounts, the tax on pension withdrawal may be manageable. But for larger pots, the consequences can be severe. Encashing a sizeable pension pot in one go can push you into a higher income tax band and create a significant bill that could otherwise be minimised. It could also reduce your ability to generate sustainable retirement income in the future.

However, it’s encouraging that the FCA data shows the vast majority of people with pots over £100,000 avoid full withdrawal, which implies the importance of tax planning is widely recognised.

Understanding tax on pension withdrawal

Under present legislation, only the first 25% of a pension withdrawal is tax free – up to a maximum of £268,275. The rest counts as taxable income at marginal rates of 20%, 40% and 45%. 

This means that on a pension pot worth more than around £168,000, a slice will be taxed at the highest 45% rate, even for someone with no other income that tax year. On a pot worth £100,000 over £17,000 could be lost in income tax when taken in one go.

In contrast, by spreading withdrawals over several years more of the money could fall into lower tax bands, reducing the tax burden. This depends on the pattern of other sources of taxable income, but it certainly can pay to plan withdrawals carefully as taking a large pension lump sum in one go can result in a substantial portion being taxed at higher rates. 

In some cases, you may also be placed on an emergency tax code, meaning you initially pay tax at a higher rate than necessary, though this can generally be reclaimed.

Other, more flexible approaches are worth considering

Rather than withdrawing everything from your pension pot, you could:

• Take only your tax-free cash and leave the rest invested
• Withdraw smaller amounts over time
• Use uncrystallised funds pension lump sums (UFPLS) to take slices of your pension where each withdrawal is 25% tax-free and 75% taxable

These approaches can be particularly useful if you are gradually reducing working hours and need an income top up. You can usually continue working while taking money from your pension but remember your pension withdrawals are added to other taxable income when calculating income tax. 

It’s also important to plan around the State Pension (currently age 66, rising to 67 by 2028), as this increases your taxable income later in life. It might be a reason to skew personal pension withdrawals to before this age in the case of retiring early.

Think beyond the tax bill

Tax is only part of the picture, and it’s very important to think things through from a holistic planning perspective as pension withdrawal is largely irreversible.

Keeping funds within a pension allows them to grow tax-efficiently. Once withdrawn, any unspent money may be subject to tax on interest, dividends or gains – unless sheltered within allowances such as ISAs.

Pay attention to how the underlying assets are doing too as poor timing can hurt your long-term outcomes. Selling investments during market volatility can permanently reduce your future retirement income.

Don’t overlook the option of guaranteed income

Another consideration is how much guaranteed income you want in retirement. A pension pot can – at any point from minimum retirement age – be converted into an income stream through an ‘annuity’. 

An annuity is a financial contract purchased from a life insurance company that converts a lump sum or series of payments into a guaranteed, regular income. These can be an important tool for many retirees because they provide a guaranteed income for the rest of your life – no matter how long that turns out to be. The income can never run out.

Importantly, annuity rates improve the older you are – all else being equal such as inflation and interest rate expectations – so if the option doesn’t seem to be appealing at retirement age that won’t necessarily always be the case.

Having at least some of your income guaranteed either with an annuity or a protected income from another source such as a defined benefit pension scheme can help to ensure you – or your spouse if applicable – can always meet bills and basic living expenses. 

It’s less flexible than on-demand withdrawals and keeping your pension invested. But an annuity can be an efficient, low risk way of converting some of your resources into steady, guaranteed income. If you encash a pot in full that option is constrained.

The impact of pension withdrawal on future contributions

Once you take taxable benefits from any of your pensions – so anything beyond the tax-free cash – special rules kick in limiting you to how much you can contribute to a pension going forward. Specifically, the ‘Money Purchase Annual Allowance’ (MPAA) limits you to £10,000 a year including tax relief and any employer contributions.

Taking tax free cash can also restrict your ability to contribute further to pensions owing to the tax-free cash ‘recycling rules’. So, if you are still working – or may do so in the future – and plan to make further contributions from your earned income then you’ll need to take account of these. There’s guidance on this from HMRC here.

Get financial advice if in doubt

You need to be very aware of all the consequences involved in taking from a pension pot – decisions taken around this are irreversible so it’s important you choose wisely. 

If you are at all unsure, we recommend you seek guidance or take regulated financial advice. Speaking to an expert such as one of our fully qualified financial coaches can give you confidence around your decision making, and they can refer you to an adviser for a full planning service if required. Pension Wise, the Government’s free service, also offers guidance to over 50s on pension matters.

Find out more about Financial Coaching

 

Sources: https://www.fca.org.uk/data/retirement-income-market-data-2024-25