Withdrawing money from my pension – 7 things you should know

When can I withdraw money from my pension?

When you approach retirement, you will need to decide how you want to draw from your pension. For personal pensions such as SIPPs (Self-Invested Personal Pensions), you can only access your pension after you turn 55, but in April 2028, the age you can access your pension is increasing to 57. 

At this point, your options include to stay invested while taking an income (known as ‘drawdown’), purchasing a guaranteed income in the form of an annuity, taking lump sums, or a combination of these. Each option requires careful consideration. 

For defined benefit pensions such as final salary schemes it’s down to the scheme rules. Often, it’s possible to take benefits a bit earlier than the scheme’s designated retirement age but it typically results in a reduced pension. 

Can you withdraw from a pension early?

As mentioned, the minimum access age for personal pension savings, including many modern workplace pensions, is currently 55 but is set to rise. It’s still a good deal lower than state pension age which is currently 66. 

Withdrawing before age 55 (or 57 from 2028) is only possible in exceptional circumstances such as severe ill health, or where there is a protected pension age that applies to certain professions such as the military. 

You should be very wary of anybody offering early pension access outside these rules. These are usually scams and will likely result in heavy tax penalties and financial loss. 

So, what should you know before withdrawing money from your pension? To help plan what is right for you, here are seven important questions you should ask yourself. 

1. When do I need the money?

Some people’s instinctive reaction to getting to retirement age is to grab what they can from their pension pot. But if you don’t have a specific purpose to withdraw money for then it may be better to keep it in a pension to remain invested tax-efficiently, in order to maximise a regular income in the future. 

In particular, cashing out at an inopportune time amid market volatility can be damaging. If you don’t need money right away, then keeping it invested could be better. However, you should understand how that money is invested in order that the strategy meets your objectives and likely timescales for drawing on it. Broadly speaking, the closer you are to drawing on the money the more you should have in cash and stabilising assets versus higher-risk areas such as shares.

2. How much tax will I pay?

Once you are 55, it’s possible to take all of a personal pension as a cash lump sum. While it can be tempting to do so it’s not usually a good idea. Normally, only the first 25% can be taken as tax free cash, with the remainder added to your taxable income. This may even take you into a higher income tax bracket. If you want to take all your money out it’s usually better to stagger withdrawals over a number of tax years. 

It is also worth noting that pension pots are set to be included in your estate for inheritance tax purposes from 2027, though if a pot passes to your spouse then there is no IHT on it for them to pay (see below). 

3. How much of my pension income is guaranteed?

Thanks to increasing longevity and low-interest rates, annuity rates fell over much of the past decade. Yet they have improved in the past couple of years as interest rates and inflation expectations increased. Annuities 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.

Other options give you flexibility and control but also come with substantial risks. In particular, if you rely on drawdown to fund your retirement you risk running out of money if you live longer than expected, or a market tumble hits the value of your pension pot. 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 can always meet bills and basic living expenses.

4. Do I want to manage my investments?

If you choose to go into drawdown you will need to commit to carrying on investing your pension pot – and to the work and risks that involves if you decide to take a ‘DIY’ approach. You will need to select and manage the investments or arrange to have them managed for you. Initially, you will have to work out how much money you can realistically afford to take out without putting your financial security at risk, and then regularly review your investments as disappointing returns could affect the sustainability of your income.

5. Will my spouse or partner have enough money if I die?

The more money you take out of your pension pot the less there will be to provide an income for your spouse or partner should you die first. You, therefore, need to estimate what income your spouse or partner could generate from their own sources and the possible death benefits from the options you are considering. 

Buying an annuity involves giving up control of the capital value of your pot and income will stop on death unless specific options to protect the income or purchase price have been selected at the start. The main options are a dependant’s pension, whereby annuity payments will continue to be paid at the level you choose to a surviving spouse or civil partner until they die, and a guarantee period, which means that even if you die early into retirement, the annuity will continue to pay out for a minimum period. 

If you keep your pension invested when you die the value of your pension fund would be payable either in the form of a cash lump sum or as an income to the beneficiaries you choose. If you pass away before you reach age 75, and as long as the fund is less than £1,073,100, any payments will be income tax-free. If you should pass away on or after your 75th birthday, the benefits can still be paid as a cash lump sum or as an income, but whoever receives them will have to pay income tax on what they receive. 

From April 2027, any remaining pension assets will form part of your estate and could be subject to Inheritance Tax – as well as income tax in the case of a post-75 death. If your aim is to reduce any potential inheritance tax, you might want to review your pensions “nominations” (who you want to benefit). Passing any remaining assets to your spouse or civil partner will be free of immediate inheritance tax with the potential for them to gift the money to other family members, taking it outside of inheritance tax completely if they live for another seven years. Or they would take a regular income and pass this on using the “gifts from surplus income” rules, although pension withdrawals potentially face income tax. 

Read more: How does inheritance tax work? | Charles Stanley

6. How can I ensure I am not being scammed?

Private pension pots often represent large sums of money and can be a target for scammers and operators of high-risk unauthorised investments. Be on your guard and only use a reputable, authorised business. 

Use the FCA Register to confirm the business you are dealing with is authorised. If you deal with an unauthorised company, you will have no protection from the Financial Ombudsman Service or Financial Services Compensation Scheme if something goes wrong. 

Be particularly wary of companies offering to ‘release’ your pension early – before 55. Businesses purporting to offer this are unlikely to be unauthorised or acting in your best interests. There are only a few exceptions where it is possible to take money from a pension before 55 such as terminal illness. Outside these, the HMRC views withdrawals as unauthorised and imposes a 55% tax charge. 

7. Should I seek pension advice or guidance?

Many pension options 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. Having an expert review your situation can give you confidence that the decisions made are right for you. Our Charles Stanley Direct Financial Plan could help you understand your specific situation and plan your retirement, while Pension Wise, the Government’s free service offers guidance to those over 50s on pension matters.

What sort of retirement can you afford?

Visit our Options at Retirement Hub, to learn more, or to arrange a free initial consultation with a dedicated planner to discuss how you can make the most of your retirement savings.